UK Car Finance Sector Navigates Legal Uncertainty: Assessing Lloyds and Close Brothers' Resilience Post-Supreme Court Ruling

The UK car finance sector has long been a linchpin of consumer access to mobility, yet recent legal and regulatory turbulence has exposed vulnerabilities in its business model. A landmark Supreme Court ruling on August 1, 2025, has recalibrated the sector's risk landscape, offering both relief and lingering uncertainties for major lenders like Lloyds Banking Group and Close Brothers. This article examines the implications of the ruling for these institutions' financial stability and stock performance, while highlighting the broader regulatory challenges that remain.

The Legal Shift: From Liability to Clarity

The Supreme Court's decision to overturn much of the October 2024 Court of Appeal ruling marked a pivotal moment. The earlier ruling had deemed undisclosed commission payments to car dealers unlawful, potentially exposing lenders to a £44 billion compensation liability. The Supreme Court, however, clarified that car dealers are not fiduciaries and are permitted to act in their commercial interests, limiting liability to cases where relationships were demonstrably unfair. This distinction, as noted in the judgment, reduces the scope of redress to a fraction of the initially feared scale.

For Lloyds, which had provisioned £1.2 billion for potential claims, the ruling removes a significant overhang. Similarly, Close Brothers—whose 20% loan book was tied to car finance—avoided a catastrophic financial hit, with its £165 million provisions now appearing more than sufficient. The Financial Conduct Authority (FCA) will now decide whether to pursue a limited redress scheme, but the Supreme Court's framework suggests payouts will target only the most egregious cases.

Financial Stability and Risk Mitigation

The ruling's immediate impact on Lloyds and Close Brothers' balance sheets is profound. Lloyds, with £919 billion in assets and a robust net interest margin of 3.04% as of June 2025, is well-positioned to absorb any residual costs. Its recent 6% year-on-year net income growth underscores its resilience. Close Brothers, though smaller, has similarly strengthened its capital position, with a 3% year-on-year loan book expansion.

However, the sector's long-term stability hinges on two factors: the FCA's redress decision and the regulatory environment post-ruling. A limited redress scheme—estimated by analysts to cost up to £15 billion—could still strain smaller players. Yet, the Supreme Court's emphasis on transparency and commercial realism may deter future litigation, fostering a more predictable operating environment.

Stock Performance: Relief and Forward-Looking Optimism

The ruling triggered a sharp rebound in Lloyds and Close Brothers' shares. On the day of the decision, LLOY.L surged over 4%, reflecting investor relief at the reduced liability. Close Brothers followed suit, with its stock climbing 4.5% as market participants priced in the legal clarity.

Analysts now project Lloyds' EPS to grow by 8-10% in 2026, driven by its expanded net interest margin and reduced provisioning costs. Close Brothers' EPS is expected to stabilize, with a potential upside if the FCA's redress scheme proves modest. Both stocks have outperformed the FTSE 100 in the short term, but their long-term trajectories will depend on the sector's ability to adapt to regulatory scrutiny.

Investment Implications and Strategic Outlook

For investors, the Supreme Court ruling presents a nuanced opportunity. Lloyds and Close Brothers' shares appear undervalued relative to their improved risk profiles, particularly given their strong capital positions and sector dominance. However, prudence is warranted. The FCA's redress decision, expected by August 4, 2025, could reintroduce volatility. A limited scheme would likely be manageable, but any overreach in compensation criteria could reignite market fears.

Moreover, the ruling's legal framework—emphasizing transparency over fiduciary duties—sets a precedent for future consumer credit cases. Lenders must now prioritize clearer disclosure practices to avoid reputational and regulatory risks. For investors, this means favoring institutions with robust compliance frameworks and agile risk management.

Conclusion: Balancing Risk and Resilience

The UK car finance sector's recent turbulence underscores the delicate balance between consumer protection and industry sustainability. The Supreme Court's ruling has provided a lifeline for Lloyds and Close Brothers, but the broader regulatory environment remains dynamic. Investors should monitor the FCA's redress decision and the sector's response to increased transparency demands. For now, the improved legal clarity and strong financial positions of these lenders justify a cautiously optimistic outlook, with a focus on long-term resilience over short-term volatility.