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Lloyds Banking Group has refused to rule out taking legal action if the bank’s ‘concerns’ about a compensation scheme for customers mis-sold car loans are not addressed.
Britain’s biggest lender has set aside almost £2billion to cover potential payouts to millions of drivers who bought cars on finance with hidden commission payments between 2007 and 2024.
The scandal has been dubbed ‘PPI on wheels’ as it echoes mis-sold payment protection insurance which cost Lloyds £22billion over a decade ago.
The Financial Conduct Authority, the City regulator, reckons compensation could be due on around 14 million unfair motor deals, averaging at about £700 each, and is consulting on a redress scheme.
Under the FCA’s existing proposals, lenders could pay out £11 billion in total compensation and operational costs related to the car finance commissions scandal.
But Lloyds finance director William Chalmers said he was ‘concerned about the proposals’ as they risked producing ‘anomalous outcomes for customers’ and were ‘disproportionate’.
‘We will do the right thing for our customers where harm has been suffered’ and give ‘appropriate redress where loss has been suffered’, Chalmers said, but he left the door open on taking the FCA to court if Lloyds did not get its way.
Chief executive Charlie Nunn cheers ‘robust financial performance alongside strategic progress’
Lloyds profits plunge on higher provisions
An extra £800million charge for potential car finance mis-selling dented the bank’s third quarter pre-tax profits, which fell 36 per cent to £1.2billion.
So far this year Lloyds has made £4.7billion, down 9 per cent from £5.1billion for the same period last year, but net interest income rose 3 per cent at £3.45billion.
The bank revealed that its net interest margin – a key measure that shows the difference between what it charges borrowers and pays savers – had risen to 3.06 per cent from 2.95 per cent.
Like other lenders, Lloyds has benefited from interest rates being higher for longer.
Britain’s four largest banks – HSBC, Barclays, Lloyds Banking Group and NatWest – posted record profits of £46billion last year and are on course for another bumper performance this year, thanks to higher rates.
This has led to renewed calls for banks to face a windfall tax on their profits in next month’s Budget.
But Lloyds, which has 28million customers, says such a move would harm lending businesses and households.
‘If we are going to have the ability and the confidence to continue to lend into the real economy, to help households and businesses invest, we need to make sure that the financial services system and Lloyds Banking Group really remains healthy in that context,’ chief executive Charlie Nunn said recently.
Chalmers said Lloyds financial performance was ‘robust’ and economic conditions as ‘stable’.
Customer deposits increased by three per cent for the year to date to £496.7billion, marking a £14billionn rise on the previous year.
The banking giant revised its 2025 guidance with underlying net interest income expected to come in at £13.6billion. This was a modest increase from previous expectations of £13.5billlion.
Jonathan Pierce, banking analyst at Jefferies, said: ‘These numbers were very in-line, clearing the way for what we expect to be a much more exciting update early next year.’
Shore Capital analyst Gary Greenwood noted Lloyds latest trading update would have reflected a guidance upgrade if it were not for the impact of motor finance provisions.
He said: ‘Overall, this suggests a modest upgrade to consensus after taking account of the additional £800million motor finance charge (not all analysts, including us, had formally put this through) although this will also impact on share count as buyback expectations will need to be reduced thus tempering the impact on subsequent years’ [earnings per share] estimates.’
Lloyds was among a handful of UK banks affected by problems linked to an outage Amazon Web Services earlier this week, with many customers reporting issues accessing their online services.
Lloyds shares were down 0.4 per cent at 84.12p in early trading. They are still up by more than 50 per cent since the start of the year.
Lenders blast FCA over ‘unfairness’
Lloyds is been joined by other lenders in its vocal criticism of the FCA’s car finance scandal redress proposals.
The Supreme Court’s ‘Johnson’ judgement in August, which was seen as a partial victory for lenders at the time amid fears of even higher payouts, laid out the test for ‘unfairness’ with respect to car finance commission agreements.
The court said that to prove ‘unfairness’ in the case of a historic agreement, multiple factors would have to be present, such as the payment of commission being undisclosed and the commission being of a certain size.
Non-disclosure of commission is not, in the Supreme Court’s view, enough on its own to show unfairness.
This is Money understands that lenders’ frustration with the FCA methodology comes from an apparent disparity with this judgment.
The FCA instead says only one of three factors need to be in place for a customer to claim redress; that there was a direct commission arrangement (DCA) in place, that the customer paid commission of more than 35 per cent on the loan, or that there was a tie-up between a dealer and a lender.
Lenders fear the result will be that nearly every finance deal agreed with a DCA over the covered period would be eligible for payouts.
Among non-bank lenders, The Times reported this week that BMW is seeking an urgent meeting with the Treasury about the issue.
Close Brothers on Tuesday said it would ‘continue to engage with the FCA in respect of these points’.
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