Motor finance: Lloyds, Barclays shares jump as FCA softens blow
Shares in motor finance lenders rallied on Wednesday morning after the Financial Conduct Authority dropped a major update on its industry-wide redress scheme.
Lloyds Banking Group – which owns the UK’s largest motor finance provider, Black Horse – was up over two per cent to 85.06p.
Meanwhile, Close Brothers, which just last week set aside a fresh £33m provision for motor finance related to “historical deficiencies,” jumped as much as six per cent to 525.58p.
Specialist lender Secure Trust was up three per cent to 1,220.00p. Barclays, which has set aside £90m in provisions, jumped one per cent to 382.40p.
It follows the Financial Conduct Authority (FCA) forecasting the total cost of its redress scheme would be at the lower end of expectations, at around £11bn when including admin fees.
The City watchdog had previously earmarked between £9bn and £18bn.
The FCA said its estimate of 85 per cent is based on participation rates in past redress schemes and the regulator’s consumer research, which showed 14 per cent of past and current motor finance holders do not intend to make a claim.
Around 14.2 million agreements from 2007 to 2024 are set to be eligible for compensation.
Motor finance lenders likely to have ‘overprovisioned’
“Lenders had already breathed a sigh of relief about the scale of the compensation they would have to dish up to motorists and today’s update from the FCA brings the bar even lower,” said Danni Hewson, AJ Bell head of financial analysis.
“But 14 million car buyers do stand to receive a significant amount of compensation after the regulator said motor finance firms broke rules and didn’t properly inform motorists of the commission that was being paid out to dealers.”
Benjamin Toms, equity analyst at RBC, said the new update meant it was likely banks had “overprovisioned”.
Lloyds has reserved a total £1.2bn for the saga, whilst Santander is on the hook for £295m and Close Brothers £165m.
Automakers have also been forced to set aside funds, with BMW allocating £200m and Ford £61m.
Since the Court of Appeal’s October ruling, which was mostly overturned by the Supreme Court, several prominent names have withdrawn from the car finance market.
Santander announced it was spinning off its motor finance division earlier this year. Meanwhile, specialist lender Secure Trust Bank said it would phase out its loan book.