Shares in UK lenders surged on Monday after a favourable supreme court ruling significantly slashed the anticipated bill for companies engulfed in the car finance scandal.
Specialist lender Close Brothers, which is the most exposed to the scandal, jumped as much as 27% at the start of trading, while the UK’s biggest motor loan provider, Lloyds Banking Group, rose by 5.5%. Shares in Barclays, which no longer provides car finance but is dealing with the fallout for the remaining loans on its books, rose by 1.1%.
The motor finance industry – which ranges from big banks such as Lloyds and Santander UK to specialist lenders and the finance arms of carmakers such as Ford and BMW – dodged a collective £44bn compensation bill after the supreme court broadly sided with lenders in a ruling on Friday.
The Financial Conduct Authority (FCA) subsequently announced plans for a much smaller redress scheme, which will go out for consultation by October. It is expected to cost lenders between £9bn and £18bn.
The scheme will help draw a line under the car finance scandal, compensating millions of drivers who were overcharged as a result of controversial commission arrangements between lenders and car dealers as far back as 2007.
Lloyds, which had previously set aside £1.2bn to cover compensation payments, did not announce any further provisions on Monday, and said that the “ultimate impact” on the bank would depend on a “number of factors”. That included the outcome of the consultation over the FCA compensation scheme, any “further interventions” including by regulators, as well as “broader implications of the judgment, including legal proceedings and complaints.”
However, Lloyds, which is the largest provider of motor loans in the UK through its Black Horse division, said any additional money put aside for compensation “is unlikely to be material in the context 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,” Lloyds added.
Close Brothers, which was one of two lenders who appealed against their case in the supreme court, has already put aside £165m for the scandal, cancelled dividends and announced plans to sell its asset management business to strengthen its finances.
It said on Monday: “We look forward to engaging with the FCA in respect of the consultation.”
