Usually, a company share price fluctuates based on the performance of the business. This is mostly derived from customer demand and how well management run things. However, the stock can be influenced by other factors, including legal and regulatory changes. A recent ruling caught my eye, which could negatively influence Lloyds Banking Group (LSE:LLOY). Here’s what I think it could mean for the Lloyds share price.
Details of what’s going on
I’m referring to the ongoing investigation from the Financial Conduct Authority (FCA) regarding historical commission payments from financial institutions to motor dealers. In the past, companies (including Lloyds) would pay motor dealers commission when providing finance to customers. However, in some cases this arrangement wasn’t disclosed to the end customer, which the FCA is investigating as not treating the customer fairly.
This investigation has been going on for some time. Some related stocks, such as Close Brothers, have been hit hard. That share price is down 75% over the past year! For Lloyds, the impact hasn’t been noticeable. The stock is up 29% over the same period. However, at the end of October, the Court of Appeal ruled that commission payments without customer notice was unlawful. Although we still wait for the FCA to conclude the investigation, the ruling is a clear statement of intent from a legal body.
Potential impact
This has seen some brokers cut their share price forecast for Lloyds. For example, the team at RBC Capital Markets have revised their forecast for the next year from 60p to 56p. They cite a potential financial hit of £3.2bn. This is given that the regulator could order all historical commissions to be paid back to the customer. To put this into perspective, Close Brothers is likely facing a £320m hit. So the Lloyds impact dwarfs this!
I don’t know if this would need to be paid back in one go or how any agreement would be structured. But in the nine months through to the end of September, the business had generated a profit after tax of £3.78bn. If the clawing back of payments was done in one go, it could wipe out a significant portion of profit on a given year.
It’s difficult to accurately predict what impact this could have on the share price. I feel there would be some short-term move lower on the announcement from the FCA, as some investors get spooked. There would also be some adjustment in the stock price to factor in the size of the fine. Yet if this is limited to a one-time hit, I don’t think it would materially change the long-term value of the stock.
What I’m doing
The FCA decision could still take some time to come out (i.e., in 2025). I already have enough exposure to the UK banking sector, so am not looking to buy Lloyds shares anyway. But if I was, I think I’d be looking to buy other banks instead that have a much smaller exposure to this motor finance problem.
