Lloyds sets aside £450m for car finance costs and compensation payouts

Lloyds Banking Group has set aside hundreds of millions to cover the potential costs of a regulatory probe into car finance loans

Lloyds Banking Group has come into in the spotlight because it is one of the biggest car finance loan providers in the UK through its brand Black Horse.

Lloyds is the first UK bank to set aside hundreds of millions of pounds in case it has to compensate car finance customers, amid a major investigation by the Financial Conduct Authority into whether people overpaid on their loans.

Alex Neill, co-founder of Consumer Voice said: 

‘All car finance providers that used discretionary commission should be setting aside money to give customers back what they’re owed. It’s only right that all of the people who have been charged too much for their loan are compensated.’

Have you paid too much for car finance?

Drivers could be owed up to £1,100 for car finance deals taken out before 2021. It’s free and straightforward to check with your car finance company whether you had a discretionary commission agreement.

‘People looking to find out if they had discretionary commission added to their loan can use free templates to write to their finance provider,’ said Neill. 

‘You may not get a final response until the financial regulator has finished its investigation but your provider does need to start investigating your complaint now.’

Our car finance guide gives you step-by-step advice for claiming car finance compensation if you suspect the interest you agreed on a loan was too high.

Alex shares her top tips if you think you might be eligible to claim

Regulator’s probe into ‘discretionary commission’

The Financial Conduct Authority (FCA) last month opened a review into whether people could be owed compensation for being charged too much for car loans, following a high number of complaints.

The Financial Conduct Authority (FCA) banned the use of ‘discretionary commission’ in 2021, estimating it could be costing consumers £165 million a year. 

Before the ban, car brokers (the person who arranges your loan) were allowed to set or adjust the interest rates they offered customers for car finance.

Car dealers were paid higher commission – known as a ‘discretionary commission arrangement’ – if they arranged a higher interest rate with their customers. This meant that car brokers had an incentive to increase how much people were charged for their car loan.

The FCA said if it finds that consumers have lost out because of widespread misconduct, it will make sure they get compensation in an orderly and efficient way.

Too early to say what the scale of redress could be

Lloyds said it set aside a remediation charge of £450 million to cover potential costs related to the financial regulator’s probe into historic car finance selling practices.

Lloyds said it was too early to say what the scale of the redress could be, and that it welcomed the watchdog’s investigation to get clarity.

‘There remains significant uncertainty as to the extent of any misconduct and customer loss, if any, the nature of any remediation action, if required, and its timing,’ the bank said.

The £450 million provision, which includes estimates for costs and potential compensation, could be more or less once the FCA completes its probe.

Matt Brizman, an equity analyst for Hargreaves Lansdown, said the £450 million charge is ‘less than some had feared but there will be question marks around how Lloyds has come to that figure.’

He added: ‘Lloyds has been honest in saying the outcome of the review is largely unknown. What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.’

Are other banks involved?

Santander said it had received ‘a number of county court claims and complaints’ about the issue following the review by the financial regulator, and it is possible it could receive more.

But the bank said: ‘In view of the inherent uncertainties, it is therefore also not possible to estimate the extent of any financial impact.’

Barclays, which is less exposed to the car finance market, acknowledged the review in its full-year results published this week.

Its finance director Anna Cross said because of the low number of customer complaints it had received, and uncertainty about the FCA’s final decision, the bank decided not to set aside a provision at this time.

Similarities with PPI mis-selling scandal

Comparisons are being drawn with the multi-billion-pound PPI mis-selling scandal. It is suggested that the regulator may decide to bring in a similar scheme of redress to deal with car finance.

But Lloyds’ chief financial officer, William Chalmers, stressed that the car finance probe was ‘not like prior remediations’, when asked by reporters whether he thought it showed any similarities to the PPI mis-selling scandal.

Lloyds had to pay billions of pounds to compensate customers who were mis-sold payment protection insurance from the mid-1990s.