Motor finance: Lloyds and Close Brothers shareholders await landmark hearing
The eyes of shareholders at Britain’s biggest lenders will be on April’s landmark motor finance hearing, as the scandal heads to the Supreme Court.
The hearing, scheduled for April 1-3, will allow car loan providers to challenge the October 2024 Court of Appeal ruling that it was unlawful for banks to pay a commission to a car dealer without the customer’s informed consent.
The Financial Conduct Authority (FCA) has indicated it will conduct a sector-wide redress scheme if the judgment is upheld, which would have significant implications for the UK finance industry.
Gary Greenwood, equity analyst at Shore Capital, told Morning Wire: “While the mood music around the motor finance commissions issue has improved a little recently… there remains significant uncertainty around the Supreme Court hearing, potential outcome of this and ultimately how any industry-wide redress scheme will be subsequently constructed and implemented by the FCA.
“The hearing itself is likely to do little to calm investor nerves in the near-term, with the Supreme Court unlikely to deliver its opinion for a further 2-3 months followed by a further wait of up to 6 weeks as the FCA deliberates on what any redress scheme should look like.
“Consequently, share prices of those companies with exposure to the issue are likely to remain volatile until we have greater certainty on the outcome.”
The scandal relates to the FCA’s investigation of discretionary commission arrangements (DCA), which allowed brokers to effectively set their own interest rates.
The FCA said this opened opportunities to overcharge customers through vague deals and forbade the use of DCAs in 2021, claiming it would save customers £165m a year.
Consumer claims could be over £30bn
Lloyds, Close Brothers and Barclays are just some of the UK’s top banks with historical exposure to the matter and have already felt the sting of potential payouts in their financial results.
Close Brothers shares sank as much as 24 per cent after the banking group swung to a loss in its half-year results driven by the £165m reserved for provisions.
Lloyds has announced the biggest hit, with a combined £1.2bn set aside for potential payouts. Meanwhile, Santander has put aside £295m and Barclays £90m.
Following Close Brothers’ shares collapse on Tuesday, Peel Hunt analysts said: “Much depends on both the Supreme Court ruling and the outcome of the FCA review of the use of discretionary commissions in motor finance.”
Russ Mould, investment director at AJ Bell, said shareholders would be “watching nervously” with the hearing marking the “next milestone” in the saga following the Government’s rejected intervention.
The Treasury said in January that it was concerned about the scale of consumer claims, which ratings agency Moody’s anticipated could be north of £30bn.
It also worried any court judgments striking the banks with fines could trigger a withdrawal of companies from the sector. The Treasury moved to intervene in the court case, but its request to participate was denied by the court.
Lloyds shares ‘underperformed’ due to motor finance
After posting its annual results, Lloyds shares jumped three per cent, despite recording a 20 per cent profit drop to £6bn after provisions.
Lloyds stock has climbed over 20 per cent in the last six months, amidst the backdrop of the car commission scandal.
Comparatively, Close Brothers has lost over 40 per cent suffering a particular hit after October’s Court of Appeal judgment.
In a note following Lloyds’ results, analysts from Peel Hunt said Lloyds’ share price had “underperformed peers since the FCA announced its review of the historic use of discretionary commission in motor finance on January 11.”
“The issue has weighed on the shares and, in our view, has been a key reason behind share price underperformance,” they added.
The analysts said: “Significant uncertainty exists as to the outcome and what remediation, if any, may be required of lenders.”