Lloyds Bank has put aside an extra £800m to deal with possible compensation claims over the motor finance scandal, with its total provision rising to almost £2bn.
The bank, one of the most exposed to an ongoing scandal in which drivers were overcharged for loans as a result of commission paid to car dealers, had previously set aside £1.15bn to deal with potential costs.
However, it said on Monday that an additional charge of £800m reflected an increased likelihood of further historical cases, particularly those affected by discretionary commission arrangements (known as DCAs), being eligible for compensation.
The new estimate comes after the Financial Conduct Authority (FCA) published a 360-page consultation paper for its redress scheme.
The regulator said last week the mis-selling scandal would cost banks £11bn overall, though it could rise to £12.4bn if all victims applied and secured payouts as part of the scheme. Payouts are expected to average £700 on an estimated 14m unfair deals.
Lloyds said the ultimate outcome may “evolve in response to representations made by various parties as well as further legal proceedings and complaints or any other broader implications of the supreme court judgment.
“However, the total £1.95bn provision, including both redress and operational costs, represents the group’s best estimate of the potential impact of the motor finance issue.”
Lloyds shares rose by 1% early Monday morning.
The Financing and Leasing Association, which represents car lenders, has warned for months that a multibillion-pound bill could disrupt the car finance market. This could lead to some providers offering fewer or more expensive loans, while others could go bust, it said.
Last week, Hyundai Capital UK revealed it had put aside £34.5m for the motor finance issue for 2024, according to its latest Companies House filings. The UK division of Honda Finance Europe said it had ringfenced £62.2m for compensation.
Both figures were released before the FCA announced the proposed scale of the compensation scheme, and therefore could be higher.
The financial arm of BMW has put aside £200m. Executives at the company have sought to hold talks with the chancellor, Rachel Reeves, about the consumer compensation scheme.
Other lenders, including Santander UK, Barclays and Close Brothers are expected to shoulder most of the costs. Banks are forecast to account for 51% of the payouts, with captive lenders shouldering 47% and independent lenders about 2%, the FCA has estimated.
The car finance debacle is one of the biggest financial scandals since payment protection insurance (PPI) mis-selling, where 34 million consumers received an average of about £1,000 each.
The dispute over car finance has weighed on the sector in recent months, with Lloyds chief executive Charlie Nunn saying last year that the case was feeding into the UK’s “investability problem”.
