Shares in Close Brothers Group PLC (LSE:CBG) and Lloyds Banking Group PLC (LSE:LLOY) tanked as a court of appeal ruled that motor dealers offering loans to customers for car purchases were liable to potential compensation for mis-selling.
In the ruling, motor dealers were said to have a fiduciary duty to customers, a decision that prompted Close Bros to say that it would stop new motor finance lending temporarily.
The specialist bank, which said it would appeal the decision, added new loans would be halted while it reviews and implements any relevant changes to documentation and processes to ensure compliance with these new requirements.
In a statement, the bank said although the case was initially determined in CBL's favour, this new appeal judgment sets a “higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than that required by current FCA rules, or regulatory requirements in force at the time of the case in question”.
While it added the financial impact of this (Hopcraft) case in isolation is not material, if it sets a precedent for similar claims it might result in ‘significant liabilities’ for the group though this is not yet possible to quantify.
The bank added it is in a strong financial position with a CET1 capital ratio of 12.8% as of 31 July 2024 and already has actions in progress further to strengthen its capital position.
For Lloyds, wealth platform Hargreaves Lansdown suggested the ruling means the bill it gets could be in the billions.
Matt Britzman, senior equity analyst, commented: “What started as a good week has ended in tears for Lloyds as it looks like the motor finance debacle could cost more than initially thought.
"Details are thin but today’s Close Brothers court ruling, upholding the appeal of the claimant in the Hopcroft motor finance case, suggests the FCA could take a harsher view in its wider investigation into motor finance discretionary commission arrangements.
"The bank has already set aside £450 million and analysts had pencilled in another .£500 million for next year.
"But with some rumours suggesting the number could be closer to £2bn, that leaves a £1bn hole to be filled in current consensus and shares have dipped 5% as a result.
"Lloyds isn’t the only name with skin in the game. But it does have more exposure than most of its peers, and while the broader Lloyds investment case looks solid, this remains one of the biggest risks.”
Shares in Close Bros tumbled 19% to 295p while Lloyds dropped 3.7% to 59.9p.
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