For UK banks, the upcoming Supreme Court hearing in April could have the most significant implications since the PPI scandal over a decade ago, analysts at Jefferies reckon, with Lloyds Banking Group PLC (LSE:LLOY)set to be a potential major beneficiary.
The case relates to claims from car finance borrowers seeking redress over undisclosed commissions paid to motor broker-dealers.
A previous Court of Appeal ruling found that borrowers could be entitled to compensation if commissions were undisclosed, based on the premise that dealers owed a fiduciary duty to borrowers.
However, the Jefferies analysts said: "We increasingly think this may go the [banking] sector's way."
They believe the Supreme Court may rule in favour of lenders by questioning the assumption of accessory liability in cases of partial disclosure, noting that the FCA has stated its rules were "not predicated on there being a fiduciary duty in generality".
The Supreme Court may take a different approach, they suggest, where it questions whether lenders can be held liable for merely making commission payments.
"For a third party to be held liable, it must have assisted dishonestly in the view of ordinary decent people," the Jefferies team said, citing precedent from the Supreme Court’s Ivey ruling.
"It could therefore be argued that it was impossible for lenders to dishonestly assist in the breach of fiduciary duty that neither it nor the lead regulator knew existed. It is a subtle but powerful distinction."
Three potential outcomes were outlined by the analysts, with the most severe scenario – broad liability across the motor finance market – potentially resulting in a £25 billion cost to the industry. They now see the probability of this as "below 50%".
A more likely outcome, in their view, is that the Supreme Court does not infer general liability, limiting FCA redress to specific cases, which would reduce potential costs to £10-15 billion.
Lloyds is estimated to face a £2-4 billion impact, the analysts calculate, which is significantly lower than the £6 billion market value decline the stock has seen since October.
The firm believes this dynamic could allow Lloyds shares to trade at least in line with NatWest’s price-to-tangible net asset value, implying a potential total shareholder return of over 50% in two years.