(Bloomberg) -- UK banks are facing paying billions in extra compensation after a London court ruling that said lenders weren’t transparent enough to customers taking out car loans, in a decision that sent bank shares tumbling.
Citigroup Inc. analysts said their previous estimate of a £9 billion ($11.7 billion) charge for the sector could double if the ruling against Close Brothers Group Plc and FirstRand Ltd sets a precedent for broader motor financing in Britain.
Shares in Lloyds Banking Group Plc slumped 7.4% on Friday, their biggest decline in more than two-and-a-half years, after the judgment. The Court of Appeal judges considered whether the commission paid to brokers had been properly disclosed to people taking out auto loans.
“The consumers were very poorly served by the brokers and the lenders alike,” the judges wrote in their ruling.
The decision may see Lloyds alone pay out £2.5 billion, Jonathan Pierce, an analysts at Jefferies International Ltd., said in a note to clients.
“It increases the risk of our worst-case scenario,” he said. Lloyds didn’t immediately respond to a request for comment made outside of normal business hours.
Shares of Close Brothers sank a record 25% on Friday, while FirstRand — which runs the MotoNovo brand in Britain — fell 2.8% by close in Johannesburg.
Both companies said in statements that they disagreed with the decision, while Close Brothers added that it had temporarily halted the writing of new UK motor finance business.
“This court judgment breaks new ground compared to previous rulings we have seen,” added Citigroup analyst Andrew Coombs.
Barclays Plc kicked off a separate London court challenge over car loans. Lawyers argued that the decision would serve as a template for how future complaints are handled ahead of a broader Financial Conduct Authority review.
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