Lloyds Banking Group has reported a sharp 36% drop in profits as the lender braces for a surge in compensation payouts following the UK car finance commission scandal.
The high street bank set aside an additional £800 million in the third quarter to cover the costs of a redress scheme proposed by the Financial Conduct Authority (FCA). This brings Lloyds’ total compensation fund to £1.95 billion.
As the UK’s largest car lender through its Black Horse division, Lloyds is expected to bear the heaviest financial burden among its peers. Pre-tax profits fell to £1.17 billion for the three months to the end of September, down from £1.8 billion in the same period last year.
The FCA’s proposed scheme, currently out for consultation, could cost car lenders up to £11 billion, aiming to resolve concerns over 14 million historic car loan contracts that may have been unfair due to controversial commission arrangements with dealers.
Although the regulator hopes to begin payouts next year, there is a possibility that lenders may challenge the scheme in court. When asked about potential legal action, Lloyds’ chief financial officer, William Chalmers, said it was “just far too early to speculate” on next steps. He added that the bank is focused on “constructive dialogue” with the FCA and emphasised the lender’s commitment: “We do intend to compensate customers appropriately where harm has been suffered. That’s an absolute commitment.”
Lloyds has expressed concern that the scheme may compensate too many customers, potentially covering 44% of car loans issued since 2007. Chalmers also noted that the proposals “do not align” with the Supreme Court ruling in August, which led the FCA to launch plans for mass compensation. He explained that the FCA’s current approach could result in payouts where the commission paid to dealers was not clearly disclosed, despite the Supreme Court not ruling that non-disclosure automatically equates to unfair treatment.
Chalmers further highlighted that the regulator’s method for calculating compensation is “very unclearly linked to harm” and insisted that Lloyds will participate in the consultation to help achieve an “appropriate and proportionate outcome.”
The drop in Lloyds’ profits comes shortly after Barclays announced it was setting aside an additional £235 million for its own car finance compensation, taking its total provision to £325 million. Although Barclays no longer offers car loans, it continues to manage the fallout from existing agreements.
