Financial ruling grants City banks approximately £7 billion increase in stock value due to changes in motor financing regulations
In a significant development for the banking sector, the Supreme Court's ruling on motor finance agreements has provided a much-needed boost to the market values of FTSE 100's leading banks.
The ruling, which clarified that motor finance lenders and car dealers do not owe fiduciary or disinterested duties to customers in typical finance agreements, has narrowed the scope for consumer claims related to commissions paid to dealers. While it retains the possibility for claims under the Consumer Credit Act’s unfair relationship test, it significantly reduces legal risks for lenders.
This judgement has had a positive impact on the market value of major players in consumer and motor finance lending, such as Lloyds Banking Group and Barclays. Lloyds Banking Group, which owns Black Horse, a leading vehicle finance provider, saw its market capitalization increase by over £3.5bn after a seven percent surge to a five-year high. Barclays added £1bn to its value after the ruling, having set aside £90m in provisions.
The FTSE 100's 'Big Five' banks - Barclays, Standard Chartered, HSBC, Natwest, and Lloyds - collectively added a combined £7.5bn to their market values by midday trading. Lenders with no exposure to the historical market enjoyed Monday's rally, with Natwest up over two percent and HSBC nearly one percent.
The rallies in the banking sector come amid a solid period for European banks, with HSBC, Barclays, and Santander surpassing their 2008 heights. The FTSE 350 bank index has recovered from a low of 4,700.07, reaching 6,291, an increase of nearly 20% in the last six months.
However, the Financial Conduct Authority (FCA) plans a redress scheme consultation in late 2025 to compensate customers in cases of unfair commission practices, presenting some regulatory and financial uncertainty for banks involved in motor finance. This could potentially introduce provisions and compliance costs on the horizon.
Despite this, the ruling has helped to alleviate fears that the final bill could be significantly higher. Derren Nathan, head of equity research at Hargreaves Lansdown, stated that the ruling is a win for UK lenders. Stephen Haddrill, director general of the Finance & Leasing Association, expressed similar sentiments, although he did express concern about the redress scheme going back to 2007, stating it is impractical due to a lack of details for both firms and customers.
The Supreme Court's motor finance ruling brought some much-needed legal certainty for UK lenders. Close Brothers, which soared over 20 percent on the back of its legal win, sealed an extra £120m. Close Brothers and First Rand successfully overturned the Court of Appeal's ruling that it was unlawful for banks to pay a commission to a car dealer without the customer's informed consent.
In conclusion, the Supreme Court ruling confines consumer claim risks related to motor finance commissions for banks such as Lloyds and Barclays but does not fully remove regulatory redress risks. This nuanced outcome likely prevents sharp negative market reactions to litigation risk but leaves some medium-term provisions and compliance costs on the horizon.
- The ruling by the Supreme Court on motor finance agreements has brought a significant boost to the market values of banks in the FTSE 100, such as Lloyds Banking Group and Barclays, by providing legal clarity to motor finance lenders.
- The decision by the Supreme Court has narrowed the scope for consumer claims related to commissions paid to car dealers, mitigating the legal risks for lenders, thereby positively impacting the banking and insurance industry.
- Banks, such as Close Brothers, that won their legal case against the Court of Appeal's ruling on motor finance commissions have experienced gains in their market values, with Close Brothers sealing an extra £120m after a 20 percent surge.
