- Court upholds industry appeal
- Fewer claims likely to succeed
- Bank shares surge on outcome
With the Supreme Court withholding its ruling on motor finance claims until after the market closed on Friday (1 August), investors had to wait until this morning (4 August) to reap the benefits of what looks to be a major win for the finance companies.
Shares in Lloyds (LLOY), the UK largest car loan provider, climbed 6p or almost 8% to 81.7p taking them to the top of the FTSE 100 leader board.
Shares in Close Brothers (CBG), which was seen as proportionately more exposed to the court ruling given its smaller capital base, soared as much as 135p or 34% to 533p before easing back to 484p for a gain or 22% or 86p.
BLACK CLOUD LIFTS
The Supreme Court overturned the Court of Appeal’s October 2024 ruling, which had suggested motor dealers owed a ‘fiduciary duty’ to borrowers and commission payments from lenders could be considered a ‘bribe’ and had hung over the sector like a cloud for the last nine months.
The Court did, however, uphold that commission structures which mislead customers or inflate the cost of credit could result in an ‘unfair relationship’ under Section 148 of the Consumer Credit Act, so the lenders aren’t completely off the hook.
Over the weekend, the FCA (Financial Conduct Authority), which supervises lenders, issued a statement to say it would consult with the motor finance companies on an industry-wide compensation scheme.
‘It will take time to establish a scheme, but we hope to start getting people any money they are owed next year,’ said FCA chief executive Nikhil Rathi.
Not all customers who have made claims won’t receive compensation, but those who do ‘will probably receive less than £950’ added Rathi.
EXPERT VIEW
Analyst Jonathan Pierce at Jefferies described Friday’s ruling as ‘a huge win for the industry’ and better than the market had expected.
‘With cases of non- or partial- disclosure now likely to be out of scope for an FCA redress scheme, lenders should be at most liable for discretionary commission arrangements and egregiously large commission payments.’
Pierce suggests in the case of Lloyds, it paid £3 billion of commission to dealers between 2007 and 2020, when DCAs or discretionary commission arrangements were banned, of which it might be liable for up to £2 billion compared with the bank’s provisions of £1.2 billion.
Lloyds itself said its initial assessment was if there is any change to the provision ‘it is unlikely to be material in the context of the group’ and it would review the situation.
Close Brothers, which has put aside £165 million in provisions, said it welcomed the Supreme Court ruling and would wait for details of any FCA redress scheme before assessing the potential impact to the group.
