Shares in UK lenders rise after watchdog softens car loan compensation costs

Shares in the UK’s biggest car lenders have risen after the UK’s financial watchdog softened the estimated total cost to the industry under its compensation scheme.

Lloyds Banking Group, Close Brothers Group, and Barclays shares were all moving higher on Wednesday morning.

It comes after the Financial Conduct Authority (FCA) set out proposals for its redress scheme, which aims to compensate customers who were treated unfairly when they were sold a car loan between 2007 and 2024.

The FCA estimates lenders could foot a bill totalling £8.2 billion worth of compensation payouts, based on about 85% of eligible consumers taking part in its scheme.

This rises to £11 billion once the cost of implementing the scheme and doing the work is taken into account.

Nevertheless, it may bring some relief to lenders who had previously been told the total cost to the industry could range between £9 billion and £18 billion.

The FCA also said before that drivers could receive less than £950 in compensation per motor finance deal, but on Tuesday it confirmed payouts are likely to average about £700.

Lloyds Banking Group, which has significant exposure to the motor finance market through its Black Horse business, acknowledged the FCA’s proposals.

It told investors it was “currently assessing the implications and the impact of this consultation in the context of its current provision for the issue and will update the market as and when appropriate”.

Lloyds previously set side £1.2 billion to cover potential costs and compensation related to the issue.

The banking group’s share price was rising by about 3% on Wednesday morning, and Barclays and Close Brothers Group were both up by around 1.5%.

Barclays has put aside some £80 million in relation to the motor finance issue, while Close Brothers’s provisions have reached £165 million.

Santander, another prominent motor finance lender, which is not listed on the London Stock Exchange, has said it was setting aside £295 million.

Gary Greenwood, an equity analyst for Shore Capital, said he estimates the motor finance industry has made around £2 billion of combined total provisions, “suggesting significant further provisions may be required”.

Danni Hewson, head of financial analysis for AJ Bell, said: “Lenders had already breathed a sigh of relief about the scale of the compensation they would have to dish up to motorists and Tuesday’s update from the FCA brings the bar even lower.

“But 14 million car buyers do stand to receive a significant amount of compensation after the regulator said motor finance firms broke rules and didn’t properly inform motorists of the commission that was being paid out to dealers.

“Whilst this scandal doesn’t come close to that surrounding PPI, it does leave a bad taste with many motorists.”