Lloyds Banking Group has warned that it faces a bigger financial hit than expected from the UK’s car finance mis-selling scandal, with total costs set to exceed the £1.2 billion already earmarked for compensation.
The bank said on Thursday that “an additional provision is likely to be required which may be material,” following the Financial Conduct Authority’s (FCA) proposal for a compensation scheme covering millions of drivers who were charged inflated interest rates on car loans.
Lloyds added that uncertainty remained over how the scheme would be interpreted and implemented.
Close Brothers, another major car loan provider, also admitted the scheme would “likely result in a material increase” to its existing £165 million provision.
The FCA estimates that about 14 million borrowers were affected, with average payouts of £700 each lower than the £950 previously expected.
The regulator’s total compensation estimate stands at £8.2 billion but could climb to £9.7 billion, still below its earlier range of £9 billion to £18 billion.
Despite the regulator’s lower payout projections, Lloyds’ shares fell by more than 3% on Thursday, while Close Brothers’ stock plunged nearly 10%. Analysts said investors were caught off guard by Lloyds’ disclosure that losses could be significantly higher.
The provisions have already dented Lloyds’ earnings, pushing its 2024 pre-tax profit down 20% to £6 billion.
RBC Capital earlier estimated the bank could ultimately face up to £4.6 billion in total costs.
The scandal has drawn comparisons to the payment protection insurance (PPI) debacle, which cost UK banks more than £50 billion in refunds with Lloyds again the most exposed.
Meanwhile, specialist lender Secure Trust issued a profit warning, citing weakness in its car finance business, while S&U reported stronger results, with pre-tax profit up 22% to £15.6 million.
