In a proactive move to address potential fallout from an ongoing investigation by the UK’s financial regulator, Lloyds Banking Group has allocated a significant sum of £450 million to cover potential costs related to car finance deals. The Financial Conduct Authority (FCA) launched an inquiry last month to examine whether consumers had been overcharged for their vehicles.
The investigation focuses on the commissions earned by brokers who facilitate car financing, earning a portion of the interest rates they set for customers. Lloyds, one of the UK’s largest motor finance providers through its subsidiary Black Horse, is deemed particularly exposed to potential claims arising from the investigation.
Under previous arrangements, lenders permitted car dealers to adjust interest rates on loans, creating an incentive for brokers to increase interest rates, thereby boosting their commissions. In a decisive move in 2021, the FCA banned these arrangements, estimating collective annual savings for drivers at £165 million.
The potential ramifications of the investigation echo parallels to the payment protection insurance (PPI) mis-selling scandal, which incurred substantial costs for banks. However, Lloyds’ Chief Financial Officer, William Chalmers, emphasised that the car finance probe differs significantly from past remediation efforts.
While the exact extent of misconduct or customer loss remains uncertain, Lloyds CEO Charlie Nunn welcomed the FCA’s inquiry as a means to provide clarity for both customers and the industry. The bank’s provision of £450 million, though less than anticipated by some, underscores the inherent uncertainty surrounding the outcome of the review.
Analysts remain cautious, with Matt Britzman from Hargreaves Lansdown noting that the figure set aside by Lloyds raises questions about its accuracy. Nevertheless, Lloyds remains committed to supporting customers amidst economic challenges, anticipating “lowish” but positive growth in the UK economy this year.
Amidst economic resilience, some customers are grappling with inflation-related costs and higher mortgage expenses. Despite these challenges, Lloyds reported a 5% increase in underlying net interest income, buoyed by rising interest rates over recent years.
As consumers await the outcome of the FCA’s investigation, guidance on motor finance complaints is available through the Financial Ombudsman Service and the Financial Conduct Authority, providing avenues for recourse for those potentially affected.
