By Elena Vardon

Shares in U.K. banks that have motor-finance operations traded higher after the Treasury signaled its intention to intervene to protect car loan providers in a Supreme Court case.

The Treasury has applied to intervene in the case on the back of concerns than an adverse ruling will hit the industry as well as the availability of motor finance for customers. Four out of five new vehicles in the U.K. are bought through these sort of loans.

"We want to see a fair and proportionate judgment that ensures compensation to consumers that is proportionate to the losses they have suffered, and allows the motor finance sector to continue playing its role in supporting millions of motorists to own vehicles," a Treasury spokesperson said.

Shares in exposed lenders rose as this could potentially reduce their potential liability and losses, which analysts have estimated could reach billions of pounds. Lloyds Banking Group is the largest motor finance provider in the U.K. through its Black Horse unit while Close Brothers has the largest relative exposure and is at the heart of one of the lawsuits. London-listed shares had risen 4% and 20%, respectively, in midday exchanges. Paragon Banking Group, S&U, Secure Trust Bank and Vanquis Banking Group also traded higher.

"The argument that any compensation due should be proportionate is key," analysts at Jefferies wrote in a note to clients. The costs faced by banks could still be material but far from the worst case scenarios, they added.

Late last year, the Supreme Court ruled that it was unlawful for car dealers to get a commission from motor-finance lenders without the customer's informed consent, setting a precedent that could lead to a financial hit and a period of uncertainty for the providers of such financing. The Supreme Court will hear an appeal in April.

Motor finance issues have also weighed on the shares of exposed banks in recent months due to a separate investigation by the Financial Conduct Authority into historical motor-finance discretionary commission arrangements. Lenders to take provisions to cover any potential customer redress schemes.

"In our view, there has been a clear sentiment change from both the regulator $(FCA)$ and the government on this topic in the last two months, with both institutions rallying behind the banks," RBC Capital Markets analysts said.

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

(END) Dow Jones Newswires

January 21, 2025 08:06 ET (13:06 GMT)

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