Shares in lenders soar after motor finance court ruling
The decision – which was handed down after the market close on Friday – saw FTSE 100 listed Lloyds shares jump nearly 8%, while Close Brothers stock soared by as much as 34% at one stage in the FTSE 250.
Barclays and NatWest shares lifted 2% as the wider sector also received a shares boost.
Lloyds and Close Brothers are seen as the most exposed to the motor finance saga and have put by hefty provisions for possible compensation bills relating to the affair.
The UK's highest court ruled that lenders are not liable for hidden commission payments in car finance schemes, finding that car dealers did not have a relationship with their customers that would require them to act only in the customers' interest.
The decision has been seen as a 'win' for lenders by significantly limiting the potential payouts in compensation, according to experts.
But the judgment left open the door for potential redress claims for very large commissions, which the Supreme Court said were unfair and therefore potentially unlawful.
The Financial Conduct Authority (FCA) said on Sunday that it would consult on an industry-wide compensation scheme, meaning millions of drivers could be owed a share of up to £18 billion – though most payouts are expected to be less than £950 each.
Close Brothers – which together with South Africa's FirstRand Bank had mounted the legal challenge against a Court of Appeal ruling that 'secret' commission payments on motor finance were unlawful – said over the weekend that it welcomed the Supreme Court judgment.
It had put by £165 million to cover potential redress, which sent it slumping to a £103.8 million half-year loss, and warned in March over a further £22 million hit to annual figures from legal and other costs linked to the motor finance case.
Close Brothers said there 'remains uncertainty as to the range of outcomes, and the financial impact to the group, including any impact on its provisioning assessment' until the outcome of the FCA's consultation is clear.
On Monday, it added: 'We look forward to engaging with the FCA in respect of the consultation.'
Lloyds said it believes any change to the group's cash set aside for motor finance compensation was 'unlikely to be material', following Friday's court ruling.
It has aside £1.2 billion to cover potential costs and compensation related to commission arrangements.
The group is exposed to the motor finance market through its Black Horse business.
But Lloyds said there continues to be a 'number of uncertainties' and will continue to review its provision.
Lloyds said: 'After initial assessment of the Supreme Court judgment – and pending resolution of the outstanding uncertainties, in particular the FCA redress scheme – the group currently believes that if there is any change to the provision it is unlikely to be material in the context of the group.'
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said the court ruling was 'a win for UK lenders, bringing some much-needed legal certainty'.
'But it's not a home run as the FCA announced plans to explore a compensation scheme that could cost the industry £9 billion to £18 billion.'
He added that Lloyds investors should be 'relatively pleased with this outcome'.
'It's broadly aligned with existing expectations, helping to alleviate fears that the final bill could be significantly higher.'
The FCA said on Sunday that the consultation will be launched by early October. If the compensation scheme goes ahead, the first payments should be made in 2026.
It urged consumers who are concerned they were not told about commission and think they may have paid too much to their motor finance lender to complain now.
They do not need to use a claims management company or law firm and doing so could cost them around 30% of any compensation paid, according to the FCA.
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