Shares in major British banks rallied on Monday following a UK Supreme Court ruling that significantly reduces the financial risks associated with a long-running probe into car finance mis-selling. The decision alleviated investor fears that the banking sector would face tens of billions of pounds in compensation payouts.
Close Brothers, a UK-based specialist bank heavily exposed to motor finance, led the gains with a surge of 25% in early trading, closing the day up 23%. Lloyds Banking Group rose 9%, Bank of Ireland climbed 3%, and Barclays added 2%.
The boost followed the Supreme Court’s ruling that car dealerships did not owe a fiduciary duty to customers, overturning a key part of a previous Court of Appeal decision. That earlier ruling had sparked alarm across the financial industry, raising concerns that compensation liabilities could reach as high as £44 billion.
Background of the Scandal
The case originated from a Financial Conduct Authority (FCA) investigation into commissions paid by lenders to car dealers. The regulator found that such commissions often incentivized dealers to charge higher interest rates, which were not clearly disclosed to consumers.
While the Supreme Court rejected most consumer claims, it upheld a decision in favor of Marcus Johnson, a factory worker from Wales, whose car loan involved unusually high commissions hidden in fine print. The court noted that he had not been informed his lender, MotoNovo (owned by South Africa’s FirstRand Bank), had the right to reject the deal.
Despite this partial consumer victory, the broader decision was welcomed by the banking sector, easing concerns over large-scale legal liabilities.
Ongoing Redress Plans and Market Implications
Although the ruling provided relief to investors, the FCA announced it would still pursue a comprehensive redress scheme that could cost lenders between £9 billion and £18 billion. This would be substantially lower than the feared £44 billion liability but still significant.
Simon Ainsworth, senior analyst at Moody’s, warned the proposed scheme remains “credit negative for UK banks,” citing the scale of likely compensation. He noted that UK lenders had already provisioned around £2 billion collectively, and further provisions may be required.
Lloyds said it would maintain its existing £1.2 billion provision and indicated that any adjustments would be “unlikely to be material” to the group’s overall financial health. Analysts, including Jonathan Pierce of Jefferies, described the FCA’s range as “consistent with estimates,” and viewed the court decision as effectively de-risking Lloyds’ shares.
The FCA’s proposal to backdate compensation claims to 2007 has sparked criticism from the industry. Stephen Haddrill, head of the Finance and Leasing Association, raised concerns about fairness and evidence availability for such historical cases. He questioned whether firms could defend themselves given data limitations from that period.
The FCA plans to release formal consultation documents in October, with compensation expected to begin in 2026.
Broader Market and Legal Impact
The Supreme Court’s decision had ripple effects beyond the UK. FirstRand, the parent company of MotoNovo, saw its shares rise 5% to a six-month high, benefiting from the overall favorable outcome despite the individual case loss.
Meanwhile, observers noted that the Treasury had previously considered intervening out of concern that massive compensation liabilities could hurt the UK’s investment climate.
As the FCA prepares its final redress scheme, the ruling provides a degree of certainty for financial markets, while still highlighting the lingering reputational and financial risks banks face from legacy mis-selling practices.
