Car Finance Shares Rise After Ruling, But Analysts Warn of Compensation Gap

Major Lenders Breathe Easier After Supreme Court Ruling

Motor finance lenders and their investors experienced a moment of relief after a landmark Supreme Court ruling reduced the potential compensation burden they faced. The decision, which favored major lenders in a car finance scandal, prevented an estimated £44 billion payout that had been dubbed “PPI on wheels.” This outcome came as a significant relief to the sector, though challenges remain.

The Financial Conduct Authority (FCA) has announced plans to consult on an industry-wide redress scheme that could begin making payouts next year. While the current estimates are lower than earlier projections of up to £40 billion, analysts warn that the funds set aside by lenders so far are still far below what they may ultimately owe.

Among the largest lenders—Lloyds, Barclays, and Close Brothers—these institutions are expected to bear the heaviest financial responsibility. The FCA has indicated that the total compensation bill could range between £9 billion and £18 billion, with RBC analysts estimating it at £11.5 billion. However, the sector as a whole has only allocated around £2 billion for compensation, according to Shore Capital Markets.

Market Reactions and Share Price Movements

In response to the ruling, share prices for several major lenders saw notable increases. Lloyds shares rose 5.9% to 80.22p, while Close Brothers surged 23% to 489.4p. Barclays, which has less exposure to the scandal, gained 1.7% to 362.6p. Smaller London-listed firms also saw positive movements, with Secure Trust Bank jumping 19% to 1,160p, Vanquis Banking Group rising 5.4%, and Paragon Banking Group increasing by 2.2%.

The FCA emphasized that any redress scheme must be fair to consumers who were overcharged while ensuring the stability of the motor finance market. This means that the overall compensation amount cannot jeopardize the market’s integrity. The regulator is expected to outline its proposed consultation by early October, followed by a six-week period before a final scheme is established.

Compensation payments are likely to start next year, with most individuals receiving less than £950—lower than the typical £1,000 to £2,000 seen after the PPI scandal.

Analysts Highlight Ongoing Concerns

Shore Capital Markets analyst Gary Greenwood noted that the Supreme Court's decision provided some relief to the motor finance industry and its investors. He pointed out that smaller lenders with limited exposure to motor dealers and those following regulatory guidelines on commission disclosure may be relatively insulated from the fallout.

However, larger lenders such as Lloyds, Barclays, and Close Brothers could still face significant remediation costs. Greenwood warned that these institutions, especially those with complex commission agreements or those that failed to follow regulatory rules, might need to set aside additional provisions, albeit at a lower level than previously feared.

One key uncertainty remains: what portion of the industry's liability may fall outside the UK banking sector and onto the finance arms of major motor manufacturers. These entities represent a large part of the motor finance industry but have set aside minimal provisions so far. It is unclear whether they will end up covering the bulk of the shortfall.

Company Responses and Future Outlook

Lloyds has stated it will continue to review its £1.2 billion provision for motor finance claims. The company acknowledged that the ultimate impact on the group depends on factors still under resolution, including the outcome of the FCA consultation and any further interventions.

Close Brothers, which had previously allocated £165 million, has not updated its provision and expressed willingness to engage with the FCA during the consultation process. Barclays, which set aside £90 million for redress in its 2024 financial results, has yet to comment on the latest developments.

Stephen Haddrill, director general of the Finance & Leasing Association, raised concerns about the feasibility of a fair redress scheme going back to 2007. He highlighted that many firms were not required to retain such old data, making the evidence base potentially unreliable. The association will closely monitor how the FCA addresses this issue in its upcoming consultation.