By Elena Vardon

Shares in U.K. lenders exposed to a probe into commissions on car loans rose after the country's financial regulator said the scope and cost of a redress plan is set to be lighter than feared.

The stocks of Lloyds Banking Group, Barclays and Close Brothers, among others, logged gains at market open on Wednesday as more clarity emerged on the size of the bill of a probe which has dragged on for months and weighed on the share prices of banks with car-finance businesses.

The Financial Conduct Authority late Tuesday narrowed down the potential range of a program to compensate customers over certain commissions for car loans paid to dealerships following a six-week consultation.

The watchdog now estimates that it will cost the industry around 11 billion pounds ($14.77 billion)--including 8.2 billion pounds in payouts including interest and 2.8 billion pounds in administrative costs--based on the assumption that 85% of eligible customers take part in the program.

The FCA calculates that 44% of car loans taken out between 2007 and 2024--or 14.2 million agreements--were unfair and are liable for compensation. Consumers could get around 700 pounds in compensation on average, which is lower than the 950-pound figure previously calculated.

The industry, which had been bracing for a worst-case scenario with potential payouts running into the tens of billions of pounds, was already reassured in August when the FCA estimated that redress costs were likely to land in the middle of a 9 billion-18 billion pound range.

The consultation is based on a Supreme Court judgment this summer which upheld a consumer's complaint that the relationship with the car dealer, which charged a hidden and disproportionate commission, wasn't fair. The ruling in parallel handed a win to banks as it upheld appeals from cases against U.K. merchant bank Close Brothers and MotoNovo of South Africa's FirstRand, finding that commissions aren't considered bribes and that dealers don't violate so-called fiduciary duty by not fully disclosing them to the customer.

The FCA has been investigating historical agreements dating back under two decades since early last year. It banned discretionary commissions on car financing in 2021.

"Many motor finance lenders did not comply with the law or the rules," FCA Chief Executive Nikhil Rathi said. "Now we have legal clarity, it's time their customers get fair compensation."

The FCA plans to publish the final rules for the redress plan by early 2026 in order to launch the compensation program later next year.

Lloyds is the largest car-finance provider in the U.K. through its Black Horse brand and has so far set aside 1.2 billion pounds for the matter. Some analysts expect the bank to release some of these provisions and launch a share buyback. "The group is currently assessing the implications and impact of this consultation in the context of its current provision for this issue," Lloyds said Wednesday.

Close Brothers, which has the largest relative exposure given that car finance represents a significant part of its loan book, as well as Bank of Ireland, FirstRand and Santander UK have booked millions of pounds in provisions to cover the potential fallout. "We expect any top-up to occur with 4Q25 results after the scheme is finalised and launched," Citi analysts said in a note to clients.

The biggest riser was Close Brothers, whose shares climbed as much as 10% before paring some of the gains. Specialist lender S&U saw its stock jump 3.6% while shares in Lloyds and Barclays hit 2.8% and 1.2% higher respectively shortly after market open.

Santander and Bank of Ireland--non-U.K. lenders that are exposed to the probe through their subsidiaries in the country--also edged up in early European morning trade. FirstRand, who might need to take further provisions, shed as much as 3.3% in Johannesburg.

The range of outcomes is tightening for the better, Jefferies analysts wrote. "Certain aspects may be challenged though, so this might not be the final (360-page) chapter of the story," they added, referring to the FCA's lengthy consultation paper.

Write to Elena Vardon at elena.vardon@wsj.com

(END) Dow Jones Newswires

October 08, 2025 04:27 ET (08:27 GMT)

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