Lloyds: £1.2BN provision for car finance payouts may be insufficient

Lloyds Banking Group has warned the £1.2billion it has set aside for potential compensation payouts related the motor finance commissions scandal may not be enough. The Financial Conduct Authority earlier this week set aside proposals that could see lenders pay out £11 billion in total compensation and operational costs.

It came after a probe of around 14.2million motor finance deals agreed between April 2007 and November 2024 found were likely to be considered unfair. Lloyds, which owns the Black Horse motor finance lender, has so far set aside £1.2billion worth of provisions to cover its share of payouts. The lender told investors on Thursday that ‘uncertainties remain outstanding on the interpretation and implementation’ of the FCA ‘s proposals.

But its ‘initial analysis and the characteristics of the proposed scheme’ suggests that ‘additional provision is likely to be required which may be material’. Lloyds added: ‘This remains subject to ongoing analysis and review of the proposals. The Group will continue to update the market as and when appropriate.’ Lloyds Banking Group shares were down 3.4 per cent in early trading at 83.44p.

And Lloyds may not be alone in owing more than they had previously set aside for compensation payouts. Shore Capital Markets estimates the entire industry has set aside just £2billion in total provisions so far – ‘suggesting significant further provisions may be required’, according to research analyst Gary Greenwood.

He noted that around 60 per cent of motor finance loans written in the first half of 2024 related to original equipment manufacturer captives – or insurance companies run by the carmakers themselves. He said: ‘Quite where these additional provisions, if required, will emerge remains to be seen.

‘[But] this suggests the non-banking industry will bear a large proportion of the bill…[and] little has been provided by these participants to date (unlike the banks which have been more proactive).’ Another bank operating in the sector is Close Brothers, which has set aside £165million to cover potential legal and compensation costs related to the mis-selling scandal.

It has also allocated £33 million for separate compensation linked to historical deficiencies in its motor finance processes. Close Brothers shares fell 4.6 per cent to 500p in early trading on Thursday. Greenwood said: ‘Industry participates… will no doubt be scrambling to interpret the latest update from the FCA and what this means.

‘However, given the significant difference between the FCA view of the total cost and the current industry view, we expect substantial scrutiny and push back from industry participants on the details of the redress scheme, most notably around the criteria for determining redress and also for calculating the cost of that redress.’