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Lloyds Banking Group is preparing for a near £2bn hit from the car finance mis-selling scandal after the UK’s biggest provider said it would take an additional £800mn provision to cover the cost of redress.
The move by Lloyds to take an extra charge comes after the Financial Conduct Authority said last week that the mis-selling scandal would cost banks a total of £11bn.
Lloyds, which provides car finance through its Black Horse business, has already taken a £1.2bn provision to cover the cost of the compensation scheme.
The FTSE 100 lender said in a statement on Monday that the FCA’s ruling increased the risk that the bank would have to provide a “higher level of redress” to customers.
It added that the ruling meant the potential impact on the bank was at “the adverse end of the range of previous expected outcomes”. Lloyds shares rose by 1.3 per cent in early morning trading in London.
The scandal stems from commissions paid by lenders to motor dealerships as part of millions of vehicle sales over many years, which the regulator and courts have said provided an incentive for higher interest rates and were insufficiently disclosed to consumers.
Lloyds’ increased provision comes despite the FCA estimating that its scheme would entitle consumers to an average compensation payout of about £700 each, compared with the £950 previously anticipated. The redress scheme applies to about 14mn motor finance agreements taken out between April 2007 and November 2024.
The projected compensation was reduced by a Supreme Court decision to overturn much of an earlier Court of Appeal ruling that had threatened to saddle lenders with compensation costs of up to £44bn.
The Supreme Court ruling — that car dealers do not have a fiduciary duty to customers — was seen as likely to reduce losses for banks, and informed the FCA’s compensation scheme.
However, Lloyds said the FCA’s redress scheme would increase the likelihood of a number of historical cases being brought against it and that a higher level of redress would be needed than anticipated in the previous scenario-based provision.
“The Group does not believe that the proposed redress methodology outlined in the consultation document reflects the actual loss to the customer. Nor does it meet the objective of ensuring that consumers are compensated proportionately and reasonably where harm has been demonstrated,” the bank said in a statement on Monday.
Close Brothers, another UK lender, last week announced that it would have to set aside greater provisions for the scheme while FirstRand, the South African bank, criticised the scheme for going beyond “expectations of what can be considered proportionate or reasonable”.
Executives at BMW, which is on the hook for potentially £200mn in related losses, are also seeking a meeting with the Treasury to discuss the scheme.
