Just days after celebrating better-than-expected third-quarter net income and earnings, investors in Lloyds (LLOY) received a cold shower as the shares lost 10% of their value in response to a court ruling in a motor finance case.

On 25 October, the Court of Appeal ruled in favour of three claimants against FirstRand Bank and Close Brothers (CBG) over the duty of motor dealers acting as credit brokers to disclose to customers commissions paid to them by lenders, and by extension the liability of lenders for any non-disclosure by the dealers.

The news sent shares in Lloyds down more than 7% and shares in Close Brothers down almost 25%, with follow-on-losses for the pair of 3% and 10% on 28 October.

Close Brothers, whose market value has now shrunk almost 70% to a little more than £400 million, said it would temporarily pause writing new UK motor finance business ‘while we review and implement any relevant changes to our documentation and processes to ensure compliance with these new requirements’, but as a major player in the car loan business it is expected to be held liable for customer redress.

Lloyds, which through its Black Horse agency is the UK’s largest provider of motor finance, said it was ‘assessing the potential impact of the decisions, as well as any broader implications, pending the outcome of the appeal applications’.

The bank also said the court’s determination that lenders were liable for dealers’ non-disclosure ‘sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision’.

The FCA (Financial Conduct Authority) said it was ‘carefully considering’ the court’s decision in light of its own review into discretionary commissions ahead of its ruling due in May 2025.

‘If the FCA adopts a wider lens thanks to this latest ruling then the results of its investigation may well come in later than next May,’ commented Danni Hewson, head of financial analysis at AJ Bell.

‘This will increase nervousness and potentially prolong the agony for Lloyds and the other names affected.’

Shore Capital’s Gary Greenwood went as far as to question whether the ruling could be extrapolated more broadly to include other types of lending where commissions are used as an incentive.

‘The ramifications of this could be huge if it was to include mortgage distribution, which is a largely intermediated industry, albeit there is no suggestion at this stage that this could be the case’, observed Greenwood.

Disclaimer: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (Tom Sieber) own shares in AJ Bell.

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