Lloyds Banking Group said that it is assessing the impact of , a landmark ruling by a court on Friday over mis-selling of car finance. This could lead to lenders compensating borrowers in billions of pounds.
The bank did not provide any information on the amount it might be required to set aside for potential payouts. It is one of the most exposed high street lenders, with about PS15bn worth of car loans held through its Black Horse unit. Lloyds stated that it would “update the market if and when appropriate”.
The Court of Appeal ruled on Friday in favor of three borrowers, stating that it was illegal for lenders to pay to car dealers without their knowledge.
The test case involved two car loan providers, FirstRand Bank, and Close Brothers. It concluded that the consumers must be aware of all material facts which could influence their borrowing decisions, including the total commission paid to dealers and how this was calculated in order to consent to a loan.
Close Brothers and FirstRand plan to appeal the ruling at the UK supreme Court.
Lloyds’ statement from Monday morning said: “This decision sets higher standards for disclosure and consent of the existence, nature and amount of any commissions paid, than was understood or applied in the motor finance sector prior to this decision.”
The bank said that the disclosure decisions of the court “go beyond scope of current FCA [Financial Conduct Authority] review on motor commissions”.
The group is assessing any potential implications of the decisions as well as the wider implications, in anticipation of the outcome of the appellation applications.
Lloyds shares dropped 2.7% on Monday to the bottom of FTSE 100, extending a loss of 7.3% on Friday when it was the largest faller in the blue-chip index.
Close Brothers’ shares, which had been among the worst performers in the FTSE 250 index, dropped 7.9% on Saturday after plummeting 27.5% the previous day. The lender temporarily suspended new car loan applications while it reviewed the ruling.
Lloyds set aside £450m for the investigation launched by the UK regulator in February amid concerns that consumers were being charged excessive prices on car loans. Analysts believe that the bank will need to raise another £1.5bn in order to pay for any potential compensation.
It is expected that the court’s ruling will influence FCA’s review. The FCA will decide by May 2025 whether it will take further action. This could include a compensation scheme for customers worth billions.
Danni Hewson is the head of financial analyses at AJ Bell. She said that Lloyds clearly was in “damage-control mode”, and “any glow left from Lloyds better than expected quarterly numbers, last week, has long since disappeared”.
Hewson said that this will “increase nervousness before the FCA’s investigation into the matter and possibly prolong the agony of Lloyds and other names affected.” If the regulator adopts a broader lens as a result of this latest ruling, then the results may come later than expected in May.
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