Lloyds and Close Brothers shares fall on motor finance ruling

By Lawrence White

LONDON (Reuters) – Shares in British lender Close Brothers dropped 6.5% on Monday, while those of bigger rival Lloyds fell 3% as bank stocks with exposure to motor finance suffered further following an adverse court of appeal judgment on Friday.

A London court ruled that motor finance brokers must fully inform customers about the existence and size of commissions when taking out car loans, amid a wider review by Britain’s financial regulator into historical sales practices in the industry.

Close Brothers, which analysts have said has the biggest exposure, plunged 21% on Friday to a near 20-year low following the ruling which also appeared to widen the scope of possible cases of mis-selling that could come under review.

Lloyds said on Monday the court’s ruling “sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision.

Analysts have said it is hard to estimate the ultimate total cost to the industry, but the sector’s total compensation bill could reach 16 billion pounds ($21 billion), making it the costliest consumer banking scandal in Britain since the faulty sales of payment protection insurance.

Bank shares are continuing to fall as investors digest the implications of the court ruling for the total compensation bill, analysts said on Monday.

Retroactivity could be broader than the 2007-2020 window we already knew about, and any finance commission model where the exact quantum of the commission was not disclosed to the customer could also get captured by the judgment,” said Benjamin Toms, analyst at RBC Capital Markets.

(Reporting By Lawrence White; Editing by Emelia Sithole-Matarise)