Lloyds warns UK car finance compensation scheme could cost €2bn

Lloyds Banking Group has estimated the car finance compensation scheme could cost the bank nearly £2bn (€2.3bn), after putting aside an extra £800m (€920m) for the mis-selling saga.

Lloyds Banking Group has estimated the car finance compensation scheme could cost the bank nearly £2bn (€2.3bn), after putting aside an extra £800m (€920m) for the mis-selling saga.

The banking group said it was expecting there to be a higher number of historical motor finance agreements that are eligible for redress than it previously thought.

This follows the UK watchdog, the Financial Conduct Authority (FCA), publishing the details of its proposed compensation scheme last week.

The FCA said payouts were due on around 14m unfair deals, averaging at about £700 (€804) each.

Lloyds' additional £800m provision brings the total value of its reserves set aside for the issue to £1.95bn (€2.24bn), including payouts to customers and operational costs.

The British lender said in a filing on Monday that the total £1.95bn including both redress and operational costs, represents the group’s “best estimate” of the potential impact of the motor finance issue.

“This reflects the increased likelihood of a higher number of historical cases,” including those dating back to 2007 and also the “likelihood of a higher level of redress than anticipated in the previous scenario based provision,” Lloyds said in its filing.

The redress programme is going ahead after the UK’s top court in August handed lenders a major reprieve, finding that banks should only pay compensation where the most serious abuse is found. The new details come after the Financial Conduct Authority spent weeks consulting with lenders, law firms and other industry participants about how customers who were missold car loans should be compensated.

“Based on the FCA proposals in their current form, the potential impact is at the adverse end of the range of previous expected outcomes,” Lloyds said. “The proposals are subject to consultation and there remain a number of uncertainties.” 

Earlier, Johannesburg-based FirstRand Ltd, which commands about 10% market share in car finance in Britain through its MotoNovo unit in the UK, said that the FCA’s proposal for compensating consumers went beyond what it previously expected would be a reasonable outcome.

Lender Close Brothers Group also said it is likely to make a “material increase” to its provision to compensate customers over the matter.

Lloyds said Monday that it remains committed to ensuring customers receive appropriate redress where they suffered loss. However, it added that it doesn’t believe that the “proposed redress methodology outlined in the consultation document reflects the actual loss to the customer.”

PA and Bloomberg