Lloyds Banking Group has been forced to put aside £450m for potential fines and compensation to borrowers, after the UK regulator opened an investigation into whether consumers had been charged inflated prices for car loans.
The figure falls far short of some analyst estimates, which suggest the investigation into loan and commission arrangements struck between 2007 and 2021 could end up costing Lloyds upwards of £2bn.
The consumer champion Martin Lewis said last month the investigation by the Financial Conduct Authority could lead to “the new PPI” – a reference to the multibillion-pound payment protection insurance scandal – which ultimately ended up costing banks more than £40bn. Lloyds was one of the biggest offenders, with a PPI compensation bill of more than £20bn.
But Lloyds stressed there was “significant uncertainty” over the extent of any misconduct or loss to customers that could result in penalties or payouts linked to its Black Horse division, which specialises in motor finance and holds £15.3bn in loans.
Lloyds, which also owns the Bank of Scotland and Halifax brands, also said it was unclear when the FCA might complete its investigation, creating further uncertainty for the high street lender.
The industry is facing a total bill of up to £13bn, according to analysts at Jefferies, while RBC Capital is now forecasting total charges of £8bn, down from a previous range of £6bn-£16bn.
Lloyds has the biggest exposure to car loans out of the UK’s high street banks at up to £2.5bn, though Barclays and Santander UK may also face significant costs of up to £357m and £1.1bn respectively, according to RBC. The specialist lender Close Brothers, which last week suspended its dividend because of uncertainty over the FCA investigation, could suffer a £252m hit.
Bosses at Barclays, which stopped offering new car loans in 2019, said this week that they did not feel it was necessary to put aside cash for the investigation, “reflecting that uncertainty, but also the very low levels of complaints that we’ve actually received”.
On the cost of the motor finance investigation, the Lloyds chief executive, Charlie Nunn, said: “[The] actual amounts could be higher or lower than the provision that we’ve taken, and we just have to see how things develop over the course of the coming months.”
Asked whether former Lloyds executives could face penalties such as clawbacks in pay if they were found to be responsible for any potential wrongdoing, Nunn said it would be a decision for the bank’s board of directors. He took over as chief executive of Lloyds in the summer of 2021.
The charge has already taken its toll on the bonus pool, which fell to £384m in 2023, compared with £446m a year earlier. Lloyds did not disclose how much of the drop reflected the potential impact of the FCA investigation.
Matt Britzman, an equity analyst at Hargreaves Lansdown, said: “The £450m provision was less than some had feared, but there will be question marks around how Lloyds has come to that figure.”
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“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,” he added.
Lloyds’s latest charge did not weigh on the bank’s annual pre-tax profits of £7.5bn, up 57% on the £4.8m a year earlier. The bank was helped by a 3% rise in net interest income – which accounts for the difference between what is paid to savers compared with what is charged to loans and mortgage customers – to £13.3bn.
Nunn received a £3.7m pay package, including a £1.3m bonus. That was down slightly from the £3.8m in total pay he was granted for 2022.
Lloyds also announced a dividend of 1.84 pence a share, as well as a £2bn share buyback, which analysts said should assure some investors who may be spooked by uncertainty over the motor finance investigation. Lloyds’ shares rose by 3% on Thursday.
Edward Firth, the managing director of UK banks research at KBW, said: “It is highly unlikely that the £450m charge will be the end of the story. But it is orders of magnitude below market fears, and the fact that the regulator approved a £2bn buyback does suggest that they are not expecting outsized charges later this year.”
