Shares in Close Brothers Group (LSE:CBG) dropped more than 5% on Monday after RBC Capital Markets downgraded the stock to “sector perform” from “outperform” and reduced its price target to 470p from 625p, pointing to fresh uncertainty surrounding the Financial Conduct Authority’s motor finance redress scheme.
Judicial Review Delays Add to Regulatory Uncertainty
RBC noted that Close Brothers shares finished at 439.80p on 3 July, valuing the lender at approximately £658 million.
The broker said it was “surprised” that the Upper Tribunal approved a judicial review of the FCA’s proposed motor finance redress scheme. The decision, confirmed last week, means the case is now unlikely to be heard until either December 2026 or February 2027, extending the timetable by at least three months compared with the FCA’s previous expectation that proceedings would not begin “before Oct’26.”
RBC also argued that the Court of Appeal’s decision last Tuesday to permit motor finance mass omnibus claims “scans negatively.” Despite the legal developments, the FCA has maintained its position that, should the redress scheme proceed, compensation payments would begin during 2027.
Potential Financial Impact Remains Significant
According to RBC, Close Brothers currently holds a £320 million provision based on the FCA’s existing proposal and is not expected to alter that figure for now. However, the regulator has instructed firms to prepare for a complaints-led process, including “making the necessary provisions and ensuring appropriate capital is maintained.”
The FCA has estimated that abandoning the current redress scheme could increase administrative costs for lenders by around £6.3 billion. RBC estimates Close Brothers’ share of that burden could reach approximately £200 million, equivalent to around 230 basis points of its Common Equity Tier 1 capital.
Dividend Expectations Reduced
RBC believes the prolonged regulatory uncertainty is likely to result in Close Brothers postponing any dividend announcement alongside its fiscal 2026 results. As a result, the broker has removed its previous forecast for a 5p dividend from its financial estimates.
The analysts also said Close Brothers is expected to generate the weakest value creation among 50 European banks over the next three years, adding that “we believe the shares could drift from here.”
Valuation Scenarios and Key Risks
RBC’s revised 470p price target is derived from a linear residual income model using the average of its adjusted 2027 and 2028 forecasts, discounted back to fiscal 2026 with a cost of equity assumption of 13.75%.
The broker’s upside case values the shares at 700p, assuming the company’s cost of equity falls to levels comparable with larger UK banking peers. Its downside scenario of 250p assumes the FCA’s motor finance review has a more severe financial impact than currently expected.
RBC highlighted several risks that could affect its investment case, including litigation outcomes, further pressure on net interest margins, a UK recession leading to higher defaults among small and medium-sized businesses, execution risks surrounding cost reduction initiatives, and the possibility that Close Brothers fails to secure approval for an internal ratings-based capital approach.
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