A landmark court ruling about the historic “mis-selling” of motor finance loans has wiped billions off Lloyds Bank amid fears about the impact on the banking sector.
Shares in the high street lender dropped by 7.3pc on Friday, finishing the day at the biggest faller in the FTSE 100, after the Court of Appeal ruled that motor finance brokers must fully inform customers about commission received from arranging car loans.
Lloyds and other lenders are currently embroiled in a Financial Conduct Authority (FCA) investigation into whether customers were aware of discretionary fee arrangements, where dealerships would receive higher commission if they sold loans to customers at higher interest rates.
The City watchdog is concerned that this practice may have seen drivers mis-sold loans that were not in their best interests.
Although the ruling is not directly tied to the FCA review, the outcome wiped more than £3bn off Lloyds’ amid concerns that the UK banking industry could be on the hook for billions of pounds in customer compensation.
Gary Greenwood, a bank analyst at Shore Capital, said: “In isolation, the financial implications of this ruling are not expected to be material, but the decision could have broader ramifications for future claims against the company and, indeed, other operators with exposure to this space, most notably Lloyds Banking Group”.
Lloyds has already made a £450m provision in its accounts to cover the costs of the FCA review but the Court decision on Friday spooked investors concerned about the impact on Lloyds.
The £38bn lender is one of Britain’s largest car finance providers through its Black Horse division.
The Court of Appeal decision also dented the market value of Close Brothers, which was one of the three motor finance lenders defending the Court of Appeal challenge.
Its share price fell 24.5pc on Friday, wiping £135m off its market cap
The Court of Appeal judges were asked to consider claims brought by customers who complained they were overcharged when buying cars because they did not consent to the commission payments.
They ruled it was unlawful for banks to pay a commission to motor dealers without the customers’ knowledge.
The Court of Appeal found that motor dealers arranging car loans must disclose all facts to borrowing customers before they can consent to the deal.
“The consumers were very poorly served by the brokers and the lenders alike,” the judges concluded.
Responding to the ruling, Close Brothers said: “The financial impact of the Hopcraft case in isolation is not material to the group.”
However, it warned that the judgement could set a precedent for similar legal mis-selling claims which could result in “significant liabilities” for the bank.
The 146-year old company said it intends to appeal the ruling to the UK Supreme Court.
The FTSE 250 lender said that it will be “temporarily pausing” the writing of new motor finance business while it reviews and implements any changes to documentation and processes in light of the case.
The FCA in January announced that it would review historical commission arrangements between car dealers and banks in the past decade.
The ruling is expected to influence whether the City watchdog introduces a redress scheme.
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