Motor finance lenders and their investors breathed a 'small sigh of relief' on Monday morning after a landmark Supreme Court ruling left them facing a much smaller compensation bill than initially feared.

On Friday, the Supreme Court delivered a blow to car buyers after it sided with major lenders in the car finance scandal. Had the decision gone the other way, it could have led to £44billion of payouts dubbed 'PPI on wheels'.

However, the Financial Conduct Authority announced it will consult on an industry-wide redress scheme that could begin paying out from next year. 

While the latest estimates are below forecasts as high as £40billion prior to the ruling, analysts have warned cash set aside by lenders so far falls well short of their potential liabilities.

And the market's biggest lenders – Lloyds, Barclays and Close Brothers – look set to shoulder the largest burden.

The Financial Conduct Authority said on Monday it would consult with the motor finance industry over a redress scheme for motorists claiming to have been overcharged, estimating the total bill could hit between £9billion and £18billion.

Analysts at RBC have estimated the cost to come in at £11.5billion.

But that would leave the sector facing an enormous shortfall, having set aside a combined total of just £2billion for compensation, according to Shore Capital Markets.

FTSE 100 Lloyds shares jumped 5.9 per cent to 80.22p in early trading, while Close Brothers - over which the scandal has weighed most heavily - soared 23 per cent to 489.4p. 

Barclays, which has relatively little exposure to the scandal, was up 1.7 per cent at 362.6p.   

Among smaller London-listed rivals Secure Trust Bank was up 19 per cent to 1,160p, while Vanquis Banking Group was up 5.4 per cent and Paragon Banking Group was up 2.2 per cent. 

Setting out the parameters of its consultation on potential compensation, the FCA said it wants to ensure any redress scheme would be 'fair to consumers who have lost out' but 'ensure the integrity of the motor finance market, so it works well for future consumers'.

This means the cumulative size of redress cannot be allowed to break the market.

The regulator is expected to detail its proposed consultation by early October, ahead of a six-week consultation period before a redress scheme is finalised.

Payments to customers are therefore likely to begin next year, with the FCA indicating most individuals will receive less than £950 in compensation – compared to typical payments of £1,000 to £2,000 after the PPI scandal.

Shore Capital research analyst Gary Greenwood wrote in a note on Monday: 'The Supreme Court's judgement will allow the motor finance industry and its investors to breathe a partial sigh of relief, given the worst-case scenario is off the table.'

He said some smaller lenders should be relatively insulated as they have 'limited exposure to motor dealers, have historically focused on relatively simple commission agreements…and have correctly followed regulatory guidelines on commission disclosure'.

However, Lloyds, Barclays and Close Brothers could face a much heavier burden.

Greenwood said: 'The larger lenders with more complicated commission agreements… and/or those that have failed to follow the regulatory rules on disclosure, may still be exposed to sizeable remediation costs, albeit to a much lesser extent than if all three judgements had been upheld.

'[Lloyds, Close Brothers and Barclays] may still need to set aside further provisions, albeit to a lesser extent than would have been the case if the Supreme Court had upheld all three of the Court of Appeal's judgements.

'However, what is unclear to us is what proportion of the industry liability may ultimately rest outside of the UK banking industry and with the finance arms of the major motor manufacturers, who presumably represent a large part of the motor finance industry but have to date set aside very little by way of provision.

'Could it be that they will be responsible for picking up the largest part of the industry provisioning shortfall?'

Lloyds told investors on Monday it would keep its £1.2billion provision for motor finance claims under review.

It said: 'The ultimate impact on the Group will be determined by a number of factors still to be resolved, in particular the outcome of the FCA consultation and any further interventions as well as any broader implications of the judgment, including legal proceedings and complaints.

'After initial assessment of the Supreme Court judgment, and pending resolution of the outstanding uncertainties, in particular the FCA redress scheme, the group currently believes that if there is any change to the provision it is unlikely to be material in the context of the group.'

Close Brothers, which had previously set aside £165million, also provided no update to its provision and said it looked forward to engaging with the FCA on its consultation.

Barclays, which set aside £90million for redress in its financial results for 2024, has yet to comment.

Stephen Haddrill, director general of the Finance & Leasing Association, said in a statement: 'We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best. 

'We will be interested to see how the FCA addresses this point in its consultation.'