Car loans probe may see billions in payouts, as Lloyds sets aside £450M

• e-mail

Lloyds has set aside £450 million to cover possible compensation payouts as a probe into car finance goes ahead.

The bank, which provides about one in six car loans in the UK, announced the hit as it revealed record annual profits of £7.5 billion for 2023.

The Financial Conduct Authority (FCA) last month launched an investigation into whether customers were overcharged for motor financing arrangements between 2007 and 2021. Analysts believe the probe could end up costing the industry billions in compensation.

Lloyds is a major player in the sector, with about £15 billion of car loans on its books via its Black Horse division. The bank does not admit wrongdoing and says it followed the rules in place at the time.

Probe: Lloyds is a major player in the sector, with about £15 billion of car loans on its books 

The probe centres on the practice of car dealers receiving a higher commission if they brokered car loans at higher interest rates.

Such arrangements – which have been banned since 2021 – gave dealers an incentive to increase how much customers had to pay, the FCA says. It has said that if it finds evidence of 'widespread misconduct' and consumers have lost out, it will 'make sure people who are owed compensation receive an appropriate settlement'.

t has said that if it finds evidence of 'widespread misconduct' and consumers have lost out, it will 'make sure people who are owed compensation receive an appropriate settlement'.

Analysts estimate that could land lenders with a bill of up to £16 billion. Lloyds may have to pay out up to £2 billion, experts think. The bank said it welcomed the 'clarity' provided by the FCA review, which comes after complaints from customers were passed to the Financial Ombudsman.

Chief executive Charlie Nunn said the £450 million set aside was a 'best estimate' covering legal and other costs involved in the review as well as potential compensation.

He added: 'We really welcome the FCA's investigation into this because there are a complex set of issues here and providing clarity to customers and the industry, we think, is really important.' 

Matt Britzman, an analyst at Hargreaves Lansdown, said the £450 million figure was less than some had feared but there would be 'question marks around how Lloyds has come to that figure'.

'What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss,' he added.

Lloyds is a major player in the sector, with about one in six car loans in the UK

The motor finance probe has already taken its toll on Close Brothers, one of Britain's oldest merchant banks, which this month saw its shares plunge by more than 20 per cent after it scrapped its dividend and warned of 'significant uncertainty' over the probe.

Other UK banks, which have also been reporting results, have not made provisions, citing a low level of complaints on the issue.

Shares in Lloyds rallied despite taking the hit.

Its record profit haul of £7.5 billion – 57 per cent higher than a year earlier – comes as banks cash in on higher interest rates.

Lloyds also yesterday upgraded its assumptions on the UK economy, which means it has had to put a lot less money aside to cover for loans turning sour.

And it benefited from a £700 million boost after loans made against The Daily Telegraph newspaper were repaid by the Barclay family.

Mr Nunn was paid £3.7 million for the year – down 2 per cent on 2022.