Overview: Lloyds flags a potentially bigger bill
Lloyds Banking Group has signalled that the cost of the motor finance mis-selling scandal could exceed its previous provisions, amid ongoing regulatory scrutiny and the evolving compensation scheme. While the lender had already set aside around £1.2bn to cover expected payments, it warned that an additional provision is likely to be required, and that it may be material. The warning came as the Financial Conduct Authority (FCA) outlined the wider industry exposure, with total compensation across lenders at several billions of pounds and the scheme still under review.
What the FCA says about the overall bill
The FCA estimated a total compensation bill for lenders at £8.2bn, a figure that could rise to £9.7bn depending on final calculations and interpretations of the proposed scheme. The regulator’s range, while at the lower end of earlier forecasts, highlights the scale of mis-selling in the motor finance market and the potential cost to banks and other lenders. For Lloyds and peers like Close Brothers, the numbers have direct implications for profitability and shareholder sentiment.
Where Lloyds stands
In February, Lloyds increased its provisions by a further £700m to cover anticipated payments to customers, bringing its total to almost £1.2bn. Management acknowledged uncertainties around how the proposals will be interpreted and implemented, indicating that more analysis is needed before a final, confirmed figure can be issued. The bank noted that the additional costs could be material, which could weigh on earnings and capital planning as the scheme takes shape.
The market reaction
The market response to Lloyds’ updates has been mixed. In the immediate wake of the disclosure, car finance lenders rallied, as investors priced in the potential for eventual compensation to customers. However, Lloyds’ shares fell more than 3% on Thursday morning, reflecting ongoing concerns about the size of the ultimate bill and the uncertainty surrounding the final scheme design. Analysts and investors are weighing the probability of higher provisions against the potential for a broader market recovery as details become clearer.
Context: a saga parallel to PPI
The motor finance scandal is often compared to the historic payment protection insurance (PPI) mis-selling episode, which involved tens of millions of consumers and a far larger average payout in the months and years after disclosure. With the current car loan case, the FCA’s total forecast underscores a systemic issue within the credit market, where sales practices and product suitability were scrutinised and corrected after the fact.
Industry impact and other players
Beyond Lloyds, the scandal has affected other lenders, including Close Brothers, which also saw its shares slide as investors reassessed risk and exposure. Some lenders, like Secure Trust, issued profit warnings tied to their car finance divisions, signaling that the sector-wide realignment could affect profitability in the near term. Yet not all players are facing the same pressures: a different sector peer, S&U, reported solid results, suggesting a mixed picture across motor finance and related lending activities.
What this means for customers and investors
For customers, the focus remains on whether they will receive compensation that reflects the mis-sold products and the fairness of the scheme’s payout structure. Average payouts in the current round are estimated at around £700 per customer, lower than earlier forecasts, with the number of affected loans running into many millions. For investors, the evolving bill represents a key risk factor, influencing capital allocation, dividend expectations, and the timing of future share buybacks or buyback programs.
Looking ahead
As regulators continue to refine the compensation framework and lenders complete their assessments, the final total cost of the motor finance scandal remains uncertain. Banks will need to balance the pace of settlements with their broader strategic priorities, including risk controls, consumer trust, and long-term profitability. In the meantime, Lloyds’ caution on additional provisions serves as a reminder that the full implications of mis-selling in motor finance may not be fully known until the scheme reaches its conclusion.
