The Lloyds Banking Group (LSE: LLOY) share price fell 3% in volatile trading when the market opened Monday morning (31 March), before steadying.
Close Brothers Group (LSE: CBG) lost 8% by midday, and we see a 34% crash over the past 12 months. It looks like nerves are on edge ahead of the car-loan mis-selling case due to kick off at the Supreme Court on 1 April.
What’s it about?
In October 2024, the Court of Appeal ruled it illegal for lenders to pay commissions to car dealers without fully-informed consent from customers. And now, Close Brothers and MotoNovo Finance are challenging that.
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What was happening was car dealers were arranging loans for customers and being paid a commission on the loans from the lenders, apparently without the borrowers being made clearly aware of it.
The Financial Conduct Authority (FCA) has been urging people who think they’re victims of mis-selling to make claims. Lenders were given until December to respond. But that could be up in the air now, depending on what happens next.
What might it cost?
We don’t know what the scale of any compensation might be like. But Alex Neill of Consumer Voice says that if the Supreme Court backs the Court of Appeal it “would be huge and would be on the scale of PPI, with compensation payments running into the tens of billions of pounds.”
Lloyds is one of the biggest lenders caught up in this. At full-year results time, the bank revealed it had set aside a further £700m to cover potential costs. That’s in addition to 2023’s £450m, taking the total to £1,150m. It’s a significant portion of the £4.5bn pre-tax profit reported for the year. And if might get bigger.
The pain could be proportionally more severe for Close Brothers. Reporting on its first half in March, the company said it expects full-year operating expenses to rise by £200m as a result, and made a £165m provision in the half. That’s a lot less than Lloyds in absolute terms, but this is a bank with a first-half operating income of just £390m. It meant a £103m operating loss before tax.
What should investors do?
There’s one main question for us. How much of the potential bad news do we think is already factored into the share price? At Lloyds, there’s a forecast price-to-earnings (P/E) ratio of 11 on the cards.
That’s the highest it’s been for a few years. And I think it might be too much if the financial pain turns out worse than feared. But we have to contrast it with a fall to under seven by 2027 if earnings growth foreacasts are accurate, which looks cheap.
At Close Brothers, a forecast loss makes such measures meaningless. And the tiny profit predicted for 2026 would put the P/E at 60, really not saying much at all.
We each have to decide whether or not to wait and hope. And I expect most people have already made up their minds. It certainly reminds us of the importance of diversification.
Lloyds remains a hold for me, though if I didn’t have any I’d consider buying. And I see Close Brothers as a recovery candidate worth considering too.
