Lloyds makes £1 billion provision for car finance claims

Lloyd’s Bank has made an additional £700 million provision for potential redress claims relating to its motor finance business. Together with £450 million set aside earlier, this means the UK’s biggest auto finance bank lender has now recognised a potential financial hit of over £1 billion following the Court of Appeal ruling last year.

In its analysis of its 2024 results, Lloyds stated: “In the fourth quarter we took an additional £700 million provision for the potential remediation costs relating to motor finance commission arrangements. This is in light of the Court of Appeal judgment on Wrench, Johnson and Hopcraft that goes beyond the scope of the original FCA motor finance commissions review.”

While the FCA review, announced in January 2024, focused on discretionary commission arrangements (DCAs), the Court of Appeal judgment handed down in October widened the discussion around commission disclosure to include fiduciary duty, any undisclosed or secret commission, and the need to obtain informed customer consent.

Lloyds acknowledged that its provision to cover a possible compensation scheme may need to be increased in the future, stating: “The provision reflects a probability weighted scenario based methodology incorporating a number of inputs. Clearly significant uncertainty remains around the final financial impact. In this context we welcome the expedited Supreme Court hearing at the beginning of April.”

The bank added : “The total £1,150 million provision, including £450 million provided in 2023, represents the Group’s best estimate of the potential impact, including both redress and operational costs, but notes that there is a significant level of uncertainty in terms of the final outcome. As a result, the final financial impact could differ materially to the amount provided.”

In its results, Lloyds reported improved performance, with growth following the acquisition of Tusker in 2023 and higher average vehicle rental values. Net fee and commission income in the latest financial results was £1,759 million compared to £1,831 million in 2023.

Matt Britzman, senior equity analyst, Hargreaves Lansdown, said: “Lloyds has capped off a strong year with a clouded fourth-quarter result, setting aside a hefty £700m provision for potential charges related to the ongoing motor finance saga. While you could argue the provision is overly cautious, Lloyds holds the largest exposure of any major UK bank, and the outcome remains uncertain.”

Last week Barclays announced in its financial results a £90 million provision for potential car finance compensation claims.

The bank is one of the lenders involved in the three cases to be heard at the Supreme Court appeal in April. Barclays lost an earlier judicial review at the High Court, where the bank sought to challenge the Financial Ombudsman Service’s (FOS) decision to uphold a complaint in a car finance arrangement involving a DCA. The payment formed part of a finance agreement between Clydesdale Financial Services, trading as Barclays Partner Finance, and Jenna Lewis, when she bought a second-hand car in 2018 from the dealership Arnold Clark

Other lenders to have announced provisions for potential car finance challenges include Close Brothers, which has set aside up to £165 million, while Santander reserved £295 million in its quarterly results in November.