Banking stocks surged on Monday after the UK Supreme Court significantly reduced potential compensation payouts in the car finance mis-selling scandal, providing major relief to lenders.
Market Reaction: Lloyds, Close Brothers Lead Gains
The Financial Conduct Authority (FCA) had initially estimated compensation costs between £9 billion and £18 billion, far lower than previous forecasts of £44 billion. This triggered a sharp rebound in banking shares:
Lloyds Banking Group (owner of Black Horse Motor Finance) jumped 9% to a 10-year high of 82.56p.
Close Brothers, one of the most exposed lenders, soared 23.5% after setting aside £165 million for potential claims.
Barclays rose 1.6%, while car finance specialist S&U surged 9.2%, calling the ruling a “victory for common sense.”
According to BBC News, the decision removes fears of a repeat of the PPI scandal, which cost banks over £40 billion in payouts.
Supreme Court Ruling: What Changed?
Last week, the Supreme Court overturned a previous ruling that deemed undisclosed dealer commissions unlawful. However, it clarified that failure to disclose commission arrangements could still be considered unfair in some cases.
The FCA announced it would now consult on a compensation scheme, with affected customers likely receiving less than £950 each, as reported by The Guardian.
Bank Statements & Industry Response
Lloyds stated any changes to its £1.2 billion provision would likely be “immaterial.”
Close Brothers welcomed the clarity and said it would engage with the FCA’s consultation.
Anthony Coombs, S&U chairman, said the ruling would “boost confidence in motor finance” and attract investment.
What’s Next for the Banking Sector?
While the ruling eases immediate financial pressure, experts warn uncertainty remains:
Hyder Jumabhoy (White & Case) noted the FCA’s final decision could still have “significant implications.”
Some analysts predict increased M&A activity, as banks may now redirect reserved funds for acquisitions.
Car manufacturers could also enter the UK finance market to stabilize lending.
For ongoing updates, follow Financial Times and Reuters.
