Lloyds Braces for £1.95bn Hit from Car Finance Mis-Selling Scandal

Bank bolsters provision as FCA eyes £700 payouts for millions of customers; investor sentiment mixed as shares recover slightly.

Lloyds Banking Group has increased its financial provision to a staggering £1.95 billion in response to the UK car finance mis-selling scandal, following a consultation proposal from the Financial Conduct Authority (FCA). The scandal could affect as many as 14.2 million car finance agreements, making this one of the most widespread compensation schemes in recent UK financial history.

FCA Crackdown on Mis-Sold Car Finance

The FCA recently announced a consultation regarding potential compensation for car finance customers who may have overpaid due to undisclosed broker commissions. The issue covers agreements between April 2007 and November 2024, during which lenders frequently failed to disclose commission structures that incentivised brokers to arrange more expensive finance deals.

• Average compensation per customer could reach £700.
• Lloyds alone has now added £800 million to its existing provision, taking its total to £1.95 billion.
• The FCA’s redress scheme is still under consultation, with final rulings expected in the coming months.

Lloyds Challenges Compensation Methodology

While the bank acknowledges customer redress is necessary, it has raised objections to the FCA’s approach. Lloyds argues that the redress methodology does not fairly reflect actual financial harm to customers and may misalign with a recent Supreme Court ruling that assessed fairness based on a case-by-case basis.

“The proposed methodology does not meet the objective of compensating consumers proportionately and reasonably where harm has been demonstrated,” Lloyds said in its statement.

The bank is expected to make formal representations during the consultation period to argue for a fairer, more fact-specific system of compensation.

Market Reaction and Share Performance

Shares in Lloyds dipped last week when it first warned of a potentially “material” increase in provisions. However, the share price rebounded by over 0.5% on Monday as the final estimate came in below analysts' worst-case scenarios.

• Lloyds shares remain more than 50% up year-to-date, showing resilience in the face of regulatory pressure.
• Investor sentiment appears cautiously optimistic, but long-term uncertainty remains until the FCA publishes its final decision.

Industry-Wide Impact

Lloyds is not alone. Other financial institutions with significant exposure to motor finance are also under scrutiny. Close Brothers, which currently holds a £165 million provision, saw its share price drop by 7% as it admitted that further adjustments would be needed.

• Car finance represents about 25% of Close Brothers’ loan book.
• Analysts expect more lenders to follow Lloyds in increasing their provisions as the FCA consultation progresses.

What This Means for Investors

For Lloyds shareholders, the increase in provisions is a concern but not a catastrophic blow, especially given the bank's strong year-to-date performance. However:

• A more punitive final ruling by the FCA could further erode future earnings.
• The scandal may weigh on sector sentiment, especially for banks with large consumer loan exposure.

Investors should monitor:

• FCA’s final methodology and timeline.
• Future updates from other lenders such as Close Brothers.
• Market sentiment across the broader UK banking sector.

Conclusion

The Lloyds car finance mis-selling scandal underscores the regulatory risks tied to consumer finance. While the current hit is large, it remains manageable. But if the FCA adopts more aggressive redress terms, this could signal broader financial and reputational risks for lenders and investors alike.

Sources: (SkyMoney.com, BBC.co.uk)