Close Brothers Group has systematically misrepresented its exposure to the FCA's Motor Finance Consumer Redress Scheme, maintaining a £300m provision against a Viceroy-estimated liability of £572m to £1.232bn — a shortfall that will push its CET1 ratio below the AT1 write-down threshold.
With 93% of its motor finance contracts involving discretionary commission arrangements — approximately 50% above the 61% peer average — CBG faces disproportionately outsized redress costs driven by its early and aggressive adoption of the DCA model, its back-weighted ageing loan profile, and its exclusive tied dealer relationships. Fitch estimates each additional £100m of redress reduces CBG's CET1 ratio by approximately 100 basis points. Under Viceroy's base case, the CET1 ratio falls to approximately 5.9% — well below the 7.0% AT1 write-down trigger — threatening permanent conversion of £200m in AT1 notes, credit rating collapse to junk, and potential resolution proceedings that would substantially wipe out equity holders. Management has already exhausted all available capital preservation measures and continues to cite "uncertainty" around scope despite explicit FCA guidance enabling credible estimates.
From FY2021–FY2024, CBG classified DCA redress as a "contingent liability" with zero provision. It recognised £165m only in H1 FY2025 and a further £135m in October 2025 — despite FCA guidance enabling credible estimates throughout. Viceroy's blue-sky minimum is £572m; the current provision represents less than half of the base case.
93% of CBG motor-finance contracts (2007–2021) involved discretionary commission arrangements, versus a 61% industry average. CBG has withheld this figure from investors, while the market applies average-bank assumptions to its provisioning — an approach Viceroy identifies as grossly understating true exposure.
Management sold Close Brothers Asset Management (+155bps CET1) and Winterflood Securities (+55bps CET1 pending), reduced RWAs 8% YoY, and cancelled dividends — exhausting all available capital levers to sustain its ratio rather than fully provisioning for the known and quantifiable liability.
CBG maintained exclusive broker and dealer relationships in which both the broker's commission and the customer's interest rate were set within the same discretionary margin — a structure the FCA explicitly identifies as a hallmark of unfairness under CONC 4.5.3R and 3.7.3R, amplifying per-loan exposure to the hybrid redress formula.
CBG's £200m AT1 notes (11.125% coupon) carry a contractual write-down trigger at 7.0% CET1. Under Viceroy's base case (~5.9% CET1), permanent write-down or equity conversion is triggered. The bear case (~3.6% CET1) makes full equity wipeout and resolution proceedings the probable outcome.
Courts award full commission repayment at 8% statutory interest (total ~£2,670 per loan) versus the FCA scheme's ~£1,108 average — a 2.4× multiple. Early-vintage CBG borrowers have strong economic incentives to pursue claims independently, underpinning Viceroy's bear-case cost estimate of £1,300 per loan.
The FCA formally prohibits DCAs in the UK motor finance market. Close Brothers begins treating its legacy DCA book — comprising an estimated 93% of its motor finance contracts — as a "contingent risk" with zero provision.
Despite the DCA ban and escalating regulatory scrutiny, Close Brothers discloses no specific customer-redress provision across three consecutive annual reports. The liability is classified as contingent throughout. DCAs banned from January 28, 2021; emerging issue handled as contingent risk only.
Following Financial Ombudsman decisions in January 2024 favouring DCA complainants in two key cases, the FCA formally steps in to investigate discretionary commission use in the motor finance market prior to the 2021 ban.
Close Brothers records a £165m provision using probability-weighted scenarios, plus approximately £22m in expected FY2025 handling and legal costs and ~£10m in professional fees. Management notes "material uncertainty." Viceroy's most optimistic (blue-sky) estimate is £572m — 91% above this initial provision.
Following the FCA's formal consultation paper proposing a compulsory £11bn industry-wide redress scheme, Close Brothers announces an additional £135m provision. Total provisions reach £300m — less than one-third of Viceroy's base case estimate of £999m.
The FCA's consultation period closes. Final policy statement and rules are expected any day in March 2026, with full scheme implementation expected later in 2026. The scheme's compulsory, lender-funded, opt-out structure is fixed and non-negotiable.
Viceroy Research publishes its analysis, concluding CBG has systematically misrepresented its exposure. FCA final rules are expected imminently. CBG remains the outlier amongst lender groups failing to acknowledge the true significance of the liability.