Last Friday (1 August), the Supreme Court ruled in favour of lenders in the motor loans case. And the Lloyds Banking Group (LSE:LLOY) share price is set to open higher this morning as a result.
The bank’s US-listed American Depository Receipt (ADR) climbed on the news and the UK-listed stock is set to follow. But investors still need to be careful.
What’s the situation?
The Supreme Court has ruled that brokers earning higher commissions by charging higher interest rates on loans doesn’t amount to bribery. It’s therefore not illegal under common law.
That’s a good thing for the likes of Lloyds, but it isn’t the end of the story. The Financial Conduct Authority (FCA) has announced its intention to consult on a compensation scheme for borrowers.
In other words, discretionary commission arrangements (DCAs) were found to be legal. But the FCA has decided that they’re unfair and a breach of banking regulations.
That means the likes of Lloyds (and other lenders) aren’t out of the woods yet. But the worst-case scenario for the bank is now realistically off the table and the stock is rallying as a result.
What happens next?
The next thing to happen is for the FCA to propose a system for how lenders should compensate borrowers. From there, it can monitor firms to make sure they follow the rules.
That means the £1.2bn that Lloyds has set aside to cover potential liabilities is almost certainly not going to be released to shareholders. But the situation still has a way to go yet.
The FDA’s consultation should launch by October and a decision should be made in time for payments to be received by customers in 2026. That means investors have a bit longer to wait.
It’s hard to make an accurate assessment of the compensation Lloyds could be required to pay. But investors might wonder whether the stock is undervalued after the Supreme Court’s ruling.
Is the share price a bargain?
The ongoing motor loans case has been weighing on Lloyds shares for some time. The stock is up 35% over the last 12 months, but it has significantly underperformed Barclays and NatWest.
This isn’t only because Lloyds has more exposure to motor loans, but I think that’s an important part of the story. And even with the share price set to climb this morning, it’s still well behind.
In terms of my own portfolio, I think there are more obvious opportunities elsewhere in the FTSE 100. So I’m looking to continue monitoring the situation, rather than buying right now.
The story continues…
Should other investors who are really interested in Lloyds think about buying now? Well, no violation of common law but the FCA convinced Lloyds – and other lenders – have violated banking regulations is a bit confusing.
Exactly what the eventual cost will be is to be determined. Analysts, however, have estimated that it’s likely to cost more than the £1.2bn the bank has put aside to cover potential liabilities.
I think that makes it difficult to consider buying the stock right now. But congratulations to anyone who’s already a shareholder – the outlook is clearly better than it was on Friday.
