Financial institutions specializing in automotive loans can exhale in relief
In a significant development for the UK car finance scandal, the Supreme Court has delivered a ruling that has capped the potential compensation banks might owe, providing regulatory clarity and significantly reducing financial risks for affected banks.
The ruling, which largely favoured the banks, rejected the claim that they and motor finance brokers were required to act in the customers' best interests regarding commission disclosure. This decision has slashed the redress bill from a potential £44 billion to likely under £18 billion.
The Financial Conduct Authority (FCA) is currently consulting on a redress scheme expected to have costs in the range of £9 billion to £18 billion. This prediction is consistent with the estimates of banking analysts, such as Jonathan Pierce at Jefferies.
Banks like Lloyds and Close Brothers saw significant positive share price reactions following the Supreme Court's decision. Lloyds' shares jumped around 7.5%, while Close Brothers' shares rose even more sharply—by about 21.6% to 30%, depending on the report. This market response reflects relief that the banks avoided the worst-case scenario of massive compensation payouts.
Lloyds, which also owns the largest car finance provider Black Horse, had previously set aside £1.2 billion for compensation. Following the judgment, it indicated that any adjustment to this provision was unlikely to be material to the group’s overall financials. Pierce believes the judgment largely de-risks Lloyds' shares from the uncertainty around the motor finance issue.
Close Brothers' share price also saw a boost when the Supreme Court allowed the appeal hearing, jumping by 8%. However, it's important to note that the FCA's prediction does not de-risk Close Brothers' shares from the 'motor issue' in the same way it does for Lloyds.
The Supreme Court delivered its judgment late in the afternoon to give traders time to absorb the news. The final compensation bill is unlikely to exceed £18 billion, according to the article.
It's worth noting that banks will still likely have to pay out over discretionary commissions, a type of commission for dealers linked to interest rates. The volatility of bank stocks in the car finance scandal may have been influenced by the Supreme Court's judgment.
The FCA’s ongoing consultation will determine the final terms of customer redress, marking the next phase in this ongoing saga.
- The Supreme Court's ruling in favor of the banks, which reduced the potential compensation bill from £44 billion to under £18 billion, has significantly minimized financial risks for banks involved in the car finance scandal, particularly those like Lloyds and Close Brothers that saw significant share price increases following the decision.
- The FCA's ongoing consultation will not de-risk Close Brothers' shares from the 'motor issue' in the same way it does for Lloyds, as banks will still likely have to pay out over discretionary commissions, a type of commission for dealers linked to interest rates, in the final terms of customer redress.
