Proactive Investors - Forecasts have been increased for potential motor finance impact on Lloyds Banking Group PLC (LSE:LON:LLOY) and other lenders after last week's Court of Appeal judgement, with analysts at RBC Capital saying they expect a delay findings from the regulator.
This follows the judgment last Friday where the Court of Appeal ruled that it was unlawful for a motor dealer to receive a commission from a lender providing motor finance unless it was disclosed to the customer who then gave informed consent to the payment.
The Court of Appeal ruled that, in this instance, that motor dealers had breached the common law principle of fiduciary duty, which required them to act in the best interest of the customer and not put themselves in a position of conflict.
This set a higher bar than under current Financial Conduct Authority rules and the banks concerned were found liable to return the commissions to the customer because there was an agency arrangement in place.
The FCA's probe into the issue of discretionary commissions arrangement in motor finance was due to be published next May.
As others have said, this increases uncertainty in the motor finance market, RBC said, with one of the plaintiff lenders, Close Brothers Group PLC (LSE:CBG), saying this week it would temporarily stop writing new car loan business until the situation was clarified.
"Whilst it is likely that the Supreme Court appeal is expedited given its commercial sensitivity, it is unlikely, in our view, that the Court reaches a conclusion soon enough for the FCA to incorporate its conclusions on its May '25 update," RBC said, predicting a delay until later next summer.
Estimates for the impact of the findings have been updated by RBC to reflect the higher uncertainty and potential downside which has been created following the Court of Appeal judgement.
For the UK banks covered, RBC has moved from a "base case" to a "plausible downside" scenario, representing a scenario where the Supreme Court upholds last week's decision, limiting the scope of banks' liability to motor finance.
The impact for Lloyds has been upped to £3.2 billion from £2.5 billion, for Santander (BME:SAN) UK to £1.4 billion from £1.1 billion, Barclays PLC (LSE:LON:BARC) to £400 million from £360 million and Close Bros to £320 million from £250 million.
As a result of the above changes, expectations for Lloyds' 2024 share buyback has been halved to £1 billion, although the RBC estimate of the total quantum of buybacks over the next three years remains unchanged.
RBC cut its share price target for Lloyds to to 56p from 60p and based on assumptions that CBG slows down its motor book lending to preserve capital and re-starts dividend distributions, its target was cut to 435p from 540p.
The Barclays price target remained unchanged at 285p.