Motor finance: Lloyds shares jump after ruling
Shares in Lloyds Banking Group and Close Brothers jumped in early deals this morning after the Supreme Court’s landmark motor finance ruling last week.
Lloyds shares jumped 5.5 per cent in early deals to 80p – a five-year high.
Shares in Close Brothers jumped 22 per cent.
Analysts at Jefferies had said Lloyds shares would rise “five to nine per cent” after the top Court ruled in favour of lenders on Friday.
Benjamin Toms, analyst at RBC Capital Markets, slapped an outperform rating on Lloyds shares on the back of the verdict.
The FTSE 100 juggernaut owns vehicle finance provider Black Horse, which is a leading lender in the UK motor finance market.
Lloyds had initially provisioned £1.2bn for claims. Santander said it could be on the hook for £295m and Close Brothers £165m.
Lloyds shares jump
But on Friday, the highest court in the land overturned the Court of Appeal’s ruling that it was unlawful for banks to pay a commission to a car dealer without the customer’s informed consent.
Whilst this was a decisive win for the City banks, the Court did find in the case of one claimant, whose case was with the South African lender First Rand. The court decided his commission was “unfair” under the Consumer Credit Act.
As a result, the Financial Conduct Authority has confirmed it will consult on an industry-wide redress scheme, where costs are expected to be between £9bn and £18bn.
This is likely to curb worst-case scenarios feared by banks, regulators and the Treasury, with analysts suggesting north of £30bn and one HSBC analyst floating the figure of £44bn.
Stephen Haddrill, director general of the Finance & Leasing Association said the industry had a “major concern about the redress scheme going back to 2007”.
Haddrill told BBC’s Today programme: “I just think that is completely impractical. It is not just firms that don’t have the details about contracts back then, customers don’t either.”
Hyder Jumbahoy, partner at White & Case LLP said: “While the estimated cost of the customer compensation scheme is less than feared by the larger motor finance lenders, who have set aside material provisions, the FCA’s decision could still have significant ramifications for the UK motor finance industry more generally“.
Motor finance lenders hail ‘victory for common sense’
Lloyds said on Monday: “[The] ultimate impact on the group will be determined by a number of factors still to be resolved” in the FCA’s redress scheme.
But it added that any increases to provision would not be “material” and affect the financial standing of the group.
“The provision will continue to be reviewed for any further information that becomes available, with an update provided as and when necessary”.
Charlie Nunn, the bank’s boss, told MPs in April there was “no evidence of harm” from the firm’s operations in the car financing market.
Meanwhile, Close Brothers, which has overhauled its business lines in recent months, welcomed the Court win and said it would continue to “assess the impact of the principles set out in the Supreme Court’s judgment”.
Anthony Coombs, chairman of S&U – which took a profit hit in April after motor finance woes – hailed the ruling as a “victory for common sense”. S&U shares were up nearly 14 per cent to 1,981.20 at market open.
Coombs added: “It will significantly boost confidence throughout the motor finance industry and benefit lenders and consumers alike in attracting investment and increasing competition”.
“As such, it is entirely consistent with the Treasury’s recent emphasis on regulation which encourages growth and which will, in the words of the Financial Conduct Authority, “ensure the integrity of the motor finance market, so that it works well for future consumers.”