Lloyds Banking Group has set aside an additional £800 million to cover potential compensation claims related to the motor finance scandal, bringing its total provision to nearly £2 billion. The bank had previously allocated £1.15 billion for the issue, which involves drivers being overcharged on loans due to hidden commissions paid to car dealers.
The increased provision reflects a higher likelihood of historical cases, particularly those involving discretionary commission arrangements (DCAs), being eligible for compensation. The announcement follows the Financial Conduct Authority's (FCA) publication of a 360-page consultation paper outlining a proposed redress scheme, which estimates the total cost to the banking sector at £11 billion, potentially rising to £12.4 billion if all affected customers claim.
Lloyds stated that the ultimate outcome may evolve based on representations from various parties and further legal proceedings, but the £1.95 billion provision represents its best estimate of the potential impact, including redress and operational costs. The bank is one of the most exposed lenders in the scandal, which has drawn comparisons to the payment protection insurance (PPI) mis-selling crisis.
Other lenders are also setting aside funds, with Hyundai Capital UK reserving £34.5 million and Honda Finance Europe ringfencing £62.2 million, though both figures may increase following the FCA's announcement. BMW's financial arm has allocated £200 million, while Santander UK, Barclays, and Close Brothers are expected to bear significant costs. The FCA estimates banks will account for 51% of payouts, with captive lenders at 47% and independent lenders at 2%.
The car finance scandal has weighed on the sector, with Lloyds CEO Charlie Nunn previously citing it as contributing to the UK's 'investability problem'. The Financing and Leasing Association has warned that the multibillion-pound bill could disrupt the car finance market, potentially leading to fewer or more expensive loans and some providers going bust.
