High street lender Lloyds has increased its estimate of compensation payments it will have to pay to customers who took out vehicles loans by £800 million to almost £2 billion.
The bank said it has reviewed the “implications and impact” of a proposed industry wide redress scheme outlined last week by the City watchdog the Financial Conduct Authority.
Lloyds, the biggest player in the motor finance sector through its Black Horse division, had already put aside £1.15 billion. But it has now decided to increase the provision to £1.95 billion.
The bank said in a stock exchange statement this morning that “based on the FCA proposals in their current form, the potential impact is at the adverse end of the range of previous expected outcomes.”
The size of the extra provision “reflects the increased likelihood of a higher number of historical cases” dating back as far as 2007 being eligible for redress ... “and also the likelihood of a higher level of redress than anticipated in the previous scenario based provision, reflecting the FCA's proposed redress calculation approach, which is less closely linked to actual customer loss than previously anticipated.”
The Supreme Court ruled on August 1 that millions of car buyers were sold motor finance deals unfairly because they were not told about substantial commissions paid by lenders to dealers.
The FCA said last week it estimates people would receive around £700 per agreement, on average.
Based on the number of consumers involved that the FCA estimates could take part in the scheme, lenders could pay out £8.2 billion in compensation.
However Lloyds said it did not believe the FCA redress methodology “reflects the actual loss to the customer” or meets “the objective of ensuring that consumers are compensated proportionately and reasonably where harm has been demonstrated.”
The bank said that while it will continue to make representations to the FCA it believes the £1.95 billion provision “represents the Group's best estimate of the potential impact of the motor finance issue.”
The car finance scandal is the biggest since the payment protection insurance (PPI) misselling debacle, where 34 million consumers received an average of about £1,000 each. Lloyds was also the most exposed to that scandal.
