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Lloyds Bank in London. Credit: William Barton, Shutterstock
Lloyds Banking Group has set aside an additional £800 million to cover compensation claims linked to the UK’s motor finance mis-selling scandal, taking its total provision to £1.95 billion.
The lender, one of the largest players in the car finance market, had previously allocated £1.15 billion for payouts.
The bank said the increase reflects new estimates from the Financial Conduct Authority (FCA), which last week outlined a proposed £11 billion redress scheme for consumers who were overcharged under discretionary commission arrangements (DCAs) – deals that allowed car dealers to set loan interest rates to boost their own commissions.
FCA widens scope for compensation claims
The FCA’s Consultation Paper states that historical cases from 2007 and earlier may qualify for compensation. This is one of the most expensive consumer compensation exercises since PPI scandal.
Lloyds announced that it would contest certain aspects of the FCA’s method, arguing the FCA’s calculations are “less closely related to actual customer losses than originally anticipated.” Lloyds shares rose by around 1% on Monday, October 13 despite the higher provision. This was due to investor relief at the fact that the extra charge was less than expected.
RBC analysts believe that lenders will now try to convince regulators to modify the scheme so it is more in line with the Supreme Court decision on compensation. The FCA estimates that banks will bear 51 per cent of the total cost, with the remainder split between captive lenders – such as car manufacturers’ finance arms – and independent providers.
Santander UK and Barclays have set aside money, as well as Close Brothers and BMW Financial Services. The Financing and Leasing Association warned that the multi-billion pound bill may disrupt the auto finance market and lead to more expensive or fewer loans.
The dispute, centred on millions of car loans issued before DCAs were banned in 2021, has been described as one of the largest financial scandals since PPI, affecting an estimated 14 million agreements with average payouts of around £700 per customer.
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