Lloyds Banking Group has cautioned that the final cost of the motor finance scandal could surpass the £1.2bn it has already set aside, as the lender conducts an initial analysis of the proposed compensation scheme. The bank stated that an additional provision may be required, which could be material, though it noted uncertainties around the interpretation and implementation of the proposals.
Close Brothers, one of the UK's largest car loan providers, also indicated that its existing £165m provision is likely to increase significantly under the scheme. The announcements came despite the City regulator, the Financial Conduct Authority (FCA), estimating average compensation payouts of £700 per customer, lower than the £950 previously anticipated. The FCA put the total industry bill at £8.2bn, at the bottom end of its earlier forecast range of £9bn to £18bn.
Shares in Lloyds fell by over 3% on Thursday after the warning, erasing gains from the previous day when the FCA's lower estimate had boosted the stock. Close Brothers shares plunged nearly 10%. Steve Clayton, head of equity funds at Hargreaves Lansdown, said the statement from Lloyds was not in the market's playbook and that shares reacted badly.
Lloyds had already set aside an additional £700m in February, bringing its total provision to almost £1.2bn. The provisions contributed to a 20% drop in the bank's 2024 pre-tax profits to just under £6bn. The motor finance scandal is the largest since the payment protection insurance (PPI) mis-selling debacle, which saw Lloyds heavily exposed.
Separately, Secure Trust issued a profit warning, expecting underlying pre-tax profit to fall by up to £9m due to its car finance division's performance. The lender is in the process of exiting vehicle finance and may need additional provisions. In contrast, motor and property finance specialist S&U reported a 22% rise in pre-tax profit to £15.6m, with motor finance provisions nearly halving to £8m.
