Lloyds Banking Group PLC (LSE:LLOY) and Close Brothers Group PLC (LSE:CBG) face much greater uncertainty over motor finance lending following the Court of Appeal rulings in three cases on Friday, according to Shore Capital.
The cases, Hopcraft (v Close Brothers) and Wrench/Johnson (v First Rand Bank / Moto Novo Finance) relate to motor finance commission arrangements notes the broker and could have significant financial implications for lenders.
Lloyds announced on Monday morning it is assessing the potential impact of the rulings.
ShoreCap says that having assumed discretionary commissions were the issue, which are already being investigated by the FCA, the ruling relates to all motor finance commission agreements where disclosure may have been insufficient.
“In particular, the case rulings imply that customers should, not only be told of the existence of a commission agreement between a lender and intermediary distributor (broker/dealer) but also have been provided with details of the amount and how this was calculated.
“Furthermore, it implies that customers should have been given the option as to whether they accepted the commission agreement.”
A statement from the FCA also noted the rulings and that it is carefully considering the decision.
Having pushed back its investigation once already, ShoreCap believes the legal ruling might see a further delay with the FCA’s investigation remit broadened.
Close Bros and the other defendants have said they intend to appeal the rulings to the Supreme Court.
Lloyds and Close Brothers are the most exposed of the quoted UK banks, in terms of potential redress/remediation costs, says the broker.
But the rulings also have implications for customers should other lenders follow Close Bros' lead and suspend writing new business while the implications are assessed.
Shore Capital also speculates whether the ruling can be extrapolated more broadly to include other lending agreements where a commission is payable to a third party as an incentive to distribute a loan.
'Hold' is the broker's recommendation on Lloyds with a 63p price target while Close Bros is a 'buy' at 277p.