Lloyds Bank has allocated £450 million to address potential compensation liabilities amidst an ongoing investigation into car finance practices. The bank, accounting for approximately one-sixth of car loans in the UK, disclosed this provision alongside record annual profits of £7.5 billion for 2023.
In recent weeks, the Financial Conduct Authority (FCA) initiated an inquiry into whether consumers were overcharged for motor finance agreements spanning from 2007 to 2021. Industry experts anticipate this investigation could lead to substantial compensation payouts, potentially amounting to billions within the sector.
Lloyds, a prominent figure in the industry with approximately £15 billion of car loans under its Black Horse division, has not admitted any misconduct and asserts compliance with regulations prevailing at the time. The focus of the investigation centers on the practice of car dealers earning higher commissions by arranging loans with elevated interest rates.
These practices, now prohibited since 2021, purportedly incentivized dealers to inflate customer costs, according to statements from the FCA. The regulatory body has pledged to ensure appropriate restitution for consumers affected by any demonstrated “widespread misconduct.”
Analysts project that lenders could collectively face liabilities of up to £16 billion, with estimations suggesting Lloyds may be liable for as much as £2 billion. The bank has expressed satisfaction with the clarity provided by the FCA’s review, prompted by customer grievances lodged with the Financial Ombudsman.
Charlie Nunn, Chief Executive Officer, characterized the £450 million provision as a “best estimate,” encompassing legal and associated expenses related to the review and potential compensation obligations.
He remarked, “We welcome the FCA’s investigation into this matter because it addresses a complex array of issues, and delivering clarity to customers and the industry is paramount.”
The repercussions of the motor finance investigation have already reverberated within the financial sector, evidenced by Close Brothers’ recent challenges. The venerable merchant bank witnessed a more than 20% decline in its shares following the cancellation of dividends and cautionary statements regarding the investigation’s ramifications.
While some UK banks, amidst reporting financial results, have not set aside provisions, citing minimal complaint volumes on the matter.
