Lloyds Sets Aside £450m Amid Car Finance Probe

Lloyds, a prominent banking giant, has earmarked £450 million to potentially cover the costs associated with an investigation into car finance deals by the UK’s financial regulator, the Financial Conduct Authority (FCA). This provision comes in response to the FCA’s probe launched last month, focusing on whether individuals have been overcharged for car loans, particularly concerning the commission structure for brokers arranging car financing.

The revelation of this provision coincides with Lloyds announcing a significant surge in annual profits, with pre-tax profits soaring to £7.5 billion last year, surpassing expectations and marking a remarkable 57% increase from the previous year.

The FCA’s investigation was prompted by concerns regarding the commission structure for car financing, where brokers earned commission based on the interest rates set for customers. Lloyds, being one of the UK’s largest motor finance providers through its subsidiary Black Horse, is perceived as particularly exposed to potential claims arising from this investigation.

Previously, some lenders allowed car dealers to adjust interest rates on loans under discretionary commission arrangements, creating an incentive for brokers to increase interest rates to boost their commission. Consequently, this practice may have resulted in consumers being charged higher amounts for their car loans. The FCA had already banned these arrangements in 2021, estimating collective annual savings of £165 million for drivers.

The FCA’s announcement has led to a surge in complaints, with the Financial Ombudsman reporting 17,000 complaints related to motor finance commission. The regulator emphasised its commitment to ensuring fair compensation for affected individuals, signalling potentially significant financial repercussions for institutions involved.

However, Lloyds’ Chief Financial Officer, William Chalmers, downplayed comparisons to previous remediations like the payment protection insurance (PPI) mis-selling scandal, asserting that the car finance probe differs substantially.

Lloyds’ CEO, Charlie Nunn, highlighted the need for clarity regarding any misconduct or losses for customers. He expressed support for the FCA’s investigation, emphasising the importance of providing clarity for both customers and the industry.

Despite the £450 million provision, the ultimate cost to Lloyds remains uncertain, with analysts questioning the basis for this figure. Nonetheless, Lloyds remains optimistic about the UK economy’s outlook, predicting “lowish” but positive growth. Nunn acknowledged challenges faced by some customers, particularly amid rising inflation and mortgage costs.

While Lloyds’ profits have been buoyed by increased interest rates, the bank remains cognisant of challenges within the broader economic landscape. As the FCA’s investigation unfolds, Lloyds continues to navigate potential risks and uncertainties associated with its involvement in the car finance sector.