Shares in Lloyds Banking Group PLC (LSE:LLOY), Barclays PLC (LSE:BARC) and Close Brothers Group PLC (LSE:CBG) rose as the cost of motor finance misselling appeared likely to come in below the bottom end of previous estimates.
The Financial Conduct Authority said it expected £8.2 billion in compensation would be paid out, with costs to the industry of the redress scheme adding a further £2.8 billion, taking the total to £11 billion.
The payout calculation proposed by the FCA, which represents an average of £700 per individual member of the public affected, is less than even the bottom end of its initial estimate of between £9 billion and £18 billion first given after the Supreme Court decision at the start of August.
Redress payments will be made to people who took motor finance agreements between 6 April 2007 and 1 November 2024, where commission was payable by the lender to the broker.
A total of 14.2 million loans made are considered “unfair”, the FCA said, around 44% of all loans made in the period between 2007 and 2024.
Around 85% of those eligible are estimated by the FCA to take part in the redress scheme, meaning roughly 12.1 million cases.
Lloyds, one of the biggest motor finance lenders, said in a statement that it is "currently assessing the implications and impact of this consultation in the context of its current provision for this issue and will update the market as and when appropriate".
Motor finance companies "broke laws and regulations" by failing to disclose information about the commission that was paid to a dealer, which it says was unfair, as consumers were denied the chance to negotiate or find a better deal. In some cases, it resulted in the price of their vehicle loan increasing.
"A compensation scheme is the best, most efficient way of getting compensation to those owed it and would make it simpler for those who would otherwise struggle to claim," the FCA said.
Consultation on the scheme continues, with FCA chief executive Nikhil Rathi saying that he knows "there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated" and that "not everyone will get everything they would like".
"But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year."
The scheme would be free to access for consumers and cost-effective for firms, he said.
Analysts at Deutsche Bank said the redress scheme was "towards the better end of expectations" for lenders.
Market analyst Kathleen Brooks at XTB agreed that the level of compensation was "towards the lower end of the range of forecasts, [but] is still a chunky cost that these lenders will need to absorb.
"In an environment where risk sentiment is on pause, it could be hard for the UK’s banking sector to avoid downward pressure later today."