𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

Close Brothers has said it is nearly doubling the amount of cash it was setting aside for the car finance compensation scheme, as it joined rival lenders in challenging the regulator’s plans.

The banking group told investors it was adding around £135 million to its existing £165 million provision.

This means it is expecting to face a bill of about £300 million to cover costs relating to the issue.

The announcement comes after Lloyds Banking Group said it would need an additional £800 million to fund the scheme – bringing its total provision to £1.95 billion.

The banks have been increasing their reserves after the Financial Conduct Authority (FCA) published the details of its proposed compensation scheme for drivers who were mis-sold a car loan between 2007 and 2024.

The FCA said payouts are due on around 14 million unfair car finance deals, averaging at about £700 each.

It calculated that the total bill to the motor finance industry could reach around £11 billion, also including the operational costs of running the scheme.

Close Brothers said the £300 million provision was its best estimate of the financial impact, and reflected the “greater likelihood that more historical cases, particularly those involving discretionary commission arrangements (DCAs), would qualify for redress”.

“The group is committed to achieving a fair outcome for customers and providing redress where loss has occurred,” the bank said.

“However, it does not believe the redress methodology proposed by the FCA appropriately reflects actual customer loss or achieves a proportionate outcome.

“In addition, the FCA’s proposed approach to assessing unfairness does not align with the legal clarity provided by the Supreme Court judgment in respect of the ‘Johnson’ case, which confirmed that the test for unfairness is highly fact specific and must take into account a broad range of factors.

“The group will continue to engage with the FCA in respect of these points.”

The comments echo those made by Lloyds on Monday, with the banking giant also raising concerns about the regulator’s calculations for how much consumers lost out and should be compensated.

Lloyds said customers could end up getting more than 100% of the commission back.

The FCA proposed that consumers are compensated the average of what it estimates they overpaid, and the commission paid, plus interest.

This takes into account the difference in the interest rate charged on loans with DCAs compared to those with flat-fee arrangements.

It believes that 44% of all agreements made between 2007 and 2024 were unfair and therefore qualify for compensation.

“We believe our scheme is the best way to settle the issue for both consumers and firms, and alternatives would be more costly and take longer,” FCA boss Nikhil Rathi said last week.

Close Brothers share price was falling by about 3% on Tuesday morning.