Lloyds sets aside £1.2 billion for car finance mis-selling scandal

Lloyds Banking Group has significantly increased the funds it is setting aside to cover potential compensation claims related to the car finance mis-selling scandal. The bank announced that it would allocate an additional £700 million, bringing its total provision for the issue to £1.2 billion, according to sources. This move has directly impacted its annual profits, as the financial institution faces growing scrutiny over the way commission on car loans was handled.

The controversy centers around allegations that Lloyds, along with other car finance providers, failed to adequately disclose commission structures paid to car dealers. Millions of customers who financed vehicles through loans could potentially be eligible for compensation if they were misled about how these commissions affected the overall cost of their agreements.

Despite the significant financial hit, Lloyds’ Group Chief Executive, Charlie Nunn, sought to reassure stakeholders by emphasizing that the current situation is not comparable to the infamous payment protection insurance (PPI) mis-selling scandal, which cost the bank billions of pounds in compensation. 

Lloyds reported a notable decline in pre-tax profits for the year, falling to £5.97 billion from £7.5 billion the previous year. This decrease was attributed not only to the rising provision for car finance compensation but also to broader economic challenges, including the UK’s slowing economy and declining interest rates.

The legal landscape surrounding the car finance scandal remains uncertain, with a key ruling expected from the UK Supreme Court in April. The court will determine whether customers were properly informed about the way commissions were structured in their car finance agreements. A ruling against the lenders could open the door to widespread compensation claims, potentially further increasing the financial impact on banks and other loan providers.

Each year, around two million new and used cars are sold in the UK through finance agreements, where customers typically pay a deposit followed by monthly installments, which include interest. Many of these agreements involved commission payments to car dealers, and concerns have been raised that customers may have been unknowingly charged higher interest rates due to undisclosed incentives.

Lloyds, which owns motor finance company Black Horse, is among the financial institutions with the greatest exposure to potential claims. Some analysts believe the bank’s latest provision may be a cautious estimate, given the uncertainty surrounding the final compensation costs.

Despite the financial setback, Lloyds’ share price saw an increase following the announcement, with investors appearing to focus on the bank’s overall strong performance rather than the immediate impact of the car finance mis-selling provision.

Lloyds has previous experience managing large-scale compensation claims, having been the UK bank most affected by the PPI scandal. PPI, a form of insurance intended to cover loan payments in cases of illness or unemployment, was widely mis-sold to customers who either did not need it or were unaware they had purchased it. By 2019, Lloyds had paid out £21.9 billion in compensation related to PPI mis-selling.

As the car finance mis-selling investigation continues, banks, lenders, and industry regulators will be closely watching the Supreme Court’s ruling, which could determine the scale of future compensation payments and the long-term impact on the UK financial sector.