Shares in leading motor finance lenders, including Lloyds Banking Group PLC (LSE:LLOY), Close Brothers Group PLC (LSE:CBG), S&U PLC (LSE:SUS) and Secure Trust Bank PLC (LSE:STB) and Vanquis Banking Group PLC (LSE:VANQ) surged on Monday, after a Supreme Court ruling removed the industry’s worst-case scenario but left investors bracing for further costs.
The sharp rebound in share prices reflected relief that the sector avoided a sweeping liability.
The Supreme Court overturned key Court of Appeal decisions, which could have seen all undisclosed commissions paid to car dealers branded illegal.
Instead, the court found that while paying commission to a dealer is not in itself a "bribe", and the dealer did not have a fiduciary duty to the customer, lenders can still be liable if the relationship with the customer was deemed “unfair”.
Factors that may inform compensation will likely include the size and nature of commissions, how they were disclosed, and the vulnerability of the customer.
In response, the Financial Conduct Authority (FCA) said it will consult on a redress scheme, with total industry costs estimated at £9 billion to £18 billion.
While this is a potentially huge sum, it is well below the worst fears, but far more than the approximately £2 billion set aside so far.
Analysts at Panmure Liberum called the ruling “much better than it might have been”, with the most severe outcome avoided.
However, they cautioned that further provisions are inevitable, especially for those with significant exposure to discretionary commission arrangements.
Echoing this, Shore Capital warned against excessive optimism, noting that while the prospect of catastrophic losses has receded, uncertainties remain.
The FCA will set out detailed terms for the redress process in the coming weeks, and final costs could vary widely.
Most claims are expected to result in compensation of less than £950 per customer, a fraction of the average paid in the PPI scandal.
Nonetheless, the redress bill will likely weigh on sector profits for some time.
Further, as ShoreCap notes, the industry must now assess whether car manufacturers’ finance arms, which have so far made little provision, will also bear a share of the liability.
For now, investors have welcomed clarity on the legal front, but the motor finance industry faces a lengthy process of consultation and claims before the episode can be put to rest.
And the market’s initial relief was clear: companies seen as most exposed to motor finance mis-selling claims posted the strongest gains, as investors priced out the risk of the sector-wide wipe-out that had hung over the industry.
In early trading, Lloyds shares were up 8%, as were S&U's. Close Brothers, one of those that would have been hardest hit under the worst-case scenario, were up 21%, while Secure Bank Trust advanced 15% and Vanquis Banking 6%.