Close Brothers surges after Supreme Court motor finance ruling

(Sharecast News) - Close Brothers shares were surging on Monday morning, after the Supreme Court overturned a Court of Appeal ruling that threatened to expose lenders to billions in compensation over mis-sold car finance commissions. However, the firm and the wider motor finance industry were still facing significant liabilities after the Financial Conduct Authority (FCA) announced plans for an industry-wide redress scheme, expected to cost up to £18bn.

The Supreme Court ruled on Friday that car dealers arranging loans did not owe fiduciary duties to their customers, reversing a previous finding that had raised fears of widespread claims against lenders.

Close Brothers and South Africa's FirstRand brought the appeal after three consumers successfully sued over undisclosed commissions in 2024.

The Court dismissed two of the claims, including the case of trainee nurse Sarah Hopcraft, but upheld a third, awarding claimant Marcus Johnson compensation after finding his loan terms unfair under the Consumer Credit Act.

It clarified that undisclosed commissions alone did not render a loan agreement unfair, with the Court stating that "no reasonable onlooker" would expect car dealers to prioritise customer interests over their own commercial incentives.

However, the Court upheld the Johnson case on the grounds that the commission - worth 55% of his total interest charges - was excessive and undisclosed, tipping the relationship into unfairness.

Johnson received £1,651 in compensation plus interest.

Close Brothers welcomed the judgment, saying it provided legal clarity and confirmed that "motor dealers do not owe fiduciary duties to customers".

The company, which had already provisioned £165m related to the case, said its Common Equity Tier 1 capital ratio stood at 14% in April and was expected to rise following the sale of its Winterflood Securities division.

Despite the ruling's benefits to lenders, the FCA confirmed over the weekend that it would consult on a redress scheme covering car finance sold before 2021, particularly discretionary commission arrangements (DCAs).

Such deals, banned in 2021, allowed dealers to increase their commission by inflating customer interest rates.

The FCA said DCAs were "widespread" and not always properly disclosed, with estimates suggesting about 40% of car finance agreements between 2007 and 2021 involved such arrangements.

It said it aimed to ensure consumers were "appropriately compensated in an orderly, consistent and efficient way", estimating the total cost to industry at no less than £9bn and potentially up to £18bn.

The regulator added that most claimants would likely receive less than £950 per deal, adding that the scheme would cover agreements back to 2007.

A consultation would be launched by October, with compensation payments expected from 2026.

Shares in Close Brothers surged as much as 27% following the Supreme Court decision, reflecting relief that the judgment had significantly reduced the sector's legal exposure.

However, analysts warned that lenders still needed to prepare for one of the largest redress programmes in UK financial history.

The FCA's chief executive, Nikhil Rathi, said that "some firms have broken the law and our rules", adding that it was "fair for their customers to be compensated".

Close Brothers said on Monday that it "looks forward to engaging with the FCA" on the consultation.

At 0922 BST, shares in Close Brothers Group were up 20.11% at 477.8p.

Reporting by Josh White for Sharecast.com.