Lenders' Stocks Rise After Motor Finance Ruling

Major Impacts on the Banking Sector

The recent ruling by the UK's Supreme Court regarding motor finance commission payments has had a significant impact on several major banking institutions. Lloyds Banking Group and Close Brothers experienced substantial increases in their stock prices following the decision, which was announced after market hours on Friday.

Lloyds shares rose nearly 8%, while Close Brothers saw an impressive jump of up to 34% in the FTSE 250. This positive movement was not limited to these two banks; Barclays and NatWest also saw their shares increase by around 2%. The broader sector received a boost as a result of the court's decision.

Key Details of the Supreme Court Ruling

The Supreme Court ruled that lenders are not liable for hidden commission payments in car finance schemes. The court determined that car dealers did not have a direct relationship with their customers that would require them to act solely in the customers' interest. This decision is viewed as a win for lenders, as it significantly limits potential compensation payouts.

However, the judgment left room for potential redress claims related to very large commissions, which the court deemed unfair and potentially unlawful. This means that while the immediate financial burden on lenders may be reduced, there could still be future implications for certain cases.

Financial Conduct Authority’s Role

The Financial Conduct Authority (FCA) has indicated that it will consult on an industry-wide compensation scheme. This could mean that millions of drivers might be owed a share of up to £18 billion. However, most payouts are expected to be less than £950 each.

Close Brothers, which had previously challenged a previous court ruling on "secret" commission payments, welcomed the Supreme Court's decision. The bank had set aside £165 million to cover potential redress, which led to a half-year loss of £103.8 million. It warned in March about an additional £22 million hit from legal and other costs associated with the motor finance case.

Despite the positive outcome, Close Brothers acknowledged that there remains uncertainty regarding the range of outcomes and the financial impact on the group. The company plans to engage with the FCA once the consultation process is clear.

Lloyds Banking Group’s Response

Lloyds Banking Group believes any changes to its cash reserves for motor finance compensation are unlikely to be material. The group has allocated £1.2 billion to cover potential costs and compensation related to commission arrangements. This exposure comes through its Black Horse business.

Lloyds noted that there are still uncertainties and will continue to review its provision. The group stated that if there is any change to the provision, it is unlikely to be significant in the context of the group.

Analysts’ Perspectives

Matt Britzman, a senior equity analyst at Hargreaves Lansdown, described the court ruling as a win for UK lenders, bringing much-needed legal certainty. However, he pointed out that the FCA's plans for a compensation scheme could cost the industry between £9 billion and £18 billion.

Britzman added that Lloyds investors should be relatively pleased with the outcome, as it aligns with existing expectations and helps alleviate fears of a significantly higher final bill.

Future Steps and Consumer Guidance

The FCA plans to launch the consultation by early October. If the compensation scheme moves forward, the first payments could be made in 2026. The FCA encourages consumers who believe they were not informed about commissions and may have paid too much to complain now.

Consumers do not need to use a claims management company or law firm, as doing so could cost them around 30% of any compensation paid. The FCA advises against such services to ensure consumers receive the full amount they are entitled to.