Lloyds Banking Group has said it is assessing the potential impact of a landmark court ruling over car finance mis-selling on Friday, which may lead to lenders paying out billions of pounds in compensation to borrowers.
The bank, which is the most exposed among high street lenders and holds about £15bn in car loans through its Black Horse division, stopped short of offering any guidance on how much it may be forced to put aside to handle potential payouts. However, Lloyds said it would update the market “if and as appropriate”.
The court of appeal ruled in favour of three borrowers on Friday, saying it was unlawful for lenders to have paid a commission to car dealers without the borrowers’ knowledge.
The test case involved borrowers of two other car loan providers – FirstRand Bank and Close Brothers – and concluded that consumers needed to know all the material facts that could affect their borrowing decision including the total commission to dealers, and how it was calculated, in order to be able to consent to the loan.
Close Brothers and FirstRand intend to appeal against the ruling in the UK supreme court.
“This sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision,” Lloyds said in its statement on Monday morning.
The bank also said the court’s decisions about disclosure “go beyond the scope of the current FCA [Financial Conduct Authority] motor commissions review”.
“The group is assessing the potential impact of the decisions, as well as any broader implications, pending the outcome of the appeal applications.”
Lloyds shares fell 2.7% to the bottom of the FTSE 100 on Monday, extending a 7.3% loss on Friday, when it was also the biggest faller on the blue-chip index.
Close Brothers shares, which were among the worst performers on the FTSE 250, fell 7.9% after plunging 27.5% on Friday. The lender has temporarily paused issuing new car loans while it reviews the ruling.
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Lloyds had already put aside £450m in February after the UK regulator opened an investigation into the matter, amid concerns that consumers had been charged inflated prices for car loans. But some analysts believe the bank may have to find another £1.5bn to cover potential compensation.
The court ruling is expected to influence the FCA review. It will decide whether to take any further action, which could include a customer compensation scheme worth billions of pounds, by May 2025.
Danni Hewson, the head of financial analysis at AJ Bell, said Lloyds was clearly in “damage control mode” and that “any glow from Lloyds’ better-than-expected quarterly numbers last week has well and truly disappeared”.
“This will increase nervousness ahead of the FCA’s own probe into the issue and potentially prolong the agony for Lloyds and the other names affected,” Hewson added. “If the regulator does adopt a wider lens thanks to this latest ruling then the results of its investigation may well come in later than May, which was when a judgment had been expected.”
