Close Brothers has agreed to sell its wealth management division to Oaktree Capital Management in a transaction valued at up to £200mn, as the lender seeks to strengthen its capital position ahead of the results of an investigation into motor finance deals.
The sale of Close Brothers Asset Management (CBAM), which is expected to be finalised early next year, forms part of a broader £400m capital plan that the FTSE 250 bank initiated in March to prepare for the potential consequences of the review, which analysts estimate could cost the industry up to £16bn.
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FCA car finance sector probe
Close Brothers, having the highest exposure to the car finance sector, suspended its dividend following the announcement of the investigation in January. The transaction, which includes £28m in contingent deferred preference shares, is anticipated to conclude early next year. The bank plans to retain approximately £172mn of the cash proceeds to “strengthen” its capital position and “improve its ability to navigate the current uncertain environment.”
UK regulators are investigating possible mis-selling in the car finance industry, linked to historic discretionary commission agreements (DCA) on car loans, which were prohibited in 2021. The Financial Conduct Authority (FCA) is concerned that the practice may have incentivised lenders and dealers to charge higher interest rates to customers.
Close Brothers’ chief executive, Adrian Sainsbury, commented on the investigation, saying: “The FCA’s review of historical motor finance commission arrangements announced in January has introduced significant uncertainty for the group. In this context, our primary objective has been to further bolster our capital position and protect our valuable franchise.”
Earlier this week, the bank announced that CEO Adrian Sainsbury has taken a medical leave of absence. No timeline was provided for his return. Group finance director Mike Morgan will take over Sainsbury’s key responsibilities, with support from Chairman Mike Biggs and the senior management team, according to a statement from Close Brothers.
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By GlobalDataThe FCA recently postponed an update on the investigation’s status from September to May next year, citing difficulties in collecting necessary data from companies. Mike Biggs, Chair of Close Brothers, said the sale would boost the bank’s common equity tier-one ratio, a key measure of financial resilience, by about 100 basis points, supporting the bank’s efforts to strengthen its capital base. The banking group also noted that realising the full potential of its wealth management unit would have required further investment and potential acquisitions, given the consolidation occurring in the sector.
By selling now, Close Brothers stated it could “achieve a competitive valuation” while refocusing on its “core lending business.”
Federico Alvarez-Demalde, Managing Director at Oaktree, expressed satisfaction with the deal, stating the asset manager was “delighted” to partner with Close Brothers. He emphasised that Oaktree intends to preserve and nurture the wealth manager’s “client-centric culture.”
In 2019, Brookfield Asset Management acquired a majority interest in Oaktree.
Close Brothers has not yet made provisions for potential compensation costs related to the motor finance investigation. However, the group disclosed in its annual results on Thursday that it had already incurred nearly £7m in “complaints handling and other operational costs associated with the FCA’s review” and expects these costs to rise to between £10m and £15m in the next financial year.
These expenses contributed to a 35% year-on-year decline in pre-tax profits, which dropped to £142.2m. Despite this, the group reported an 8% increase in net inflows for its asset management business, with assets under management growing by 18 per cent to £19.3bn. In contrast, its securities division, Winterflood, posted an operating loss of £1.7mn due to “unfavourable” market conditions.
Close Brothers AM prepares to shift into its own wealth business
