Overview: Lloyds signals a potentially larger bill from car loan mis-selling
Lloyds Banking Group has indicated that its financial exposure to the motor finance scandal could be larger than previously anticipated. The group signalled that additional provisions may be required as investigations advance and the scope of potential payouts becomes clearer. This development adds another layer of pressure on the bank’s earnings amid a broader industry correction following regulatory scrutiny of mis-sold car finance loans.
The regulator’s backdrop: FCA’s broader compensation landscape
The Financial Conduct Authority (FCA) has placed a nationwide focus on motor finance mis-selling, estimating a total compensation bill for lenders of around £8.2bn, with potential up to £9.7bn depending on how schemes are interpreted and implemented. While this is at the lower end of earlier forecasts, the size of individual provisions and the pace of payouts remain fluid for banks like Lloyds and peers involved in the sector.
Lloyds’ current stance and market reaction
In February, Lloyds set aside an additional £700m to cover expected compensation, lifting its total provisions to just under £1.2bn. Yet the bank warned on Thursday that, based on initial analysis and the characteristics of the proposed settlement framework, “an additional provision is likely to be required which may be material.” This acknowledgment points to a potential escalation in the financial hit as the regulator’s scheme details become clearer.
Traders initially greeted news that car finance lenders could face a rising bill with a rally in some shares. However, Lloyds’ stock subsequently retreated, slipping more than 3% in Thursday trading as investors recalibrated expectations around the ultimate cost and the impact on profitability.
The wider profit picture for Lloyds
The motor finance scandal is already shaping the earnings trajectory for the group. Lloyds’ 2024 pre-tax profit came in at just under £6bn, down roughly 20% from the prior year, with a portion of that decline tied to provisions tied to mis-selling and other regulatory matters. Analysts have highlighted the potential for the final bill to exceed the current provisioning level, with estimates ranging up to several billions of pounds depending on how settlements are quantified and charged.
Implications for investors and the market
News of a possible larger-than-expected hit reinforces the caution investors are applying to lenders with material exposure to mis-selling schemes. The car finance episode, though still developing, has similarities to the historic PPI scandal, which ultimately cost banks tens of billions of pounds and affected consumer confidence and balance sheets for years. For now, Lloyds and peers are navigating a delicate balance: building sufficient reserves to satisfy regulators and customers, while trying to protect earnings momentum and shareholder returns.
What comes next?
Key questions for investors include how quickly the FCA’s compensation framework will be finalized, how the distribution of payouts will unfold, and what additional reserves banks may require as the interpretation of settlement mechanics evolves. For Lloyds, the emphasis will be on the size of any new provisions and their timing, as well as the impact on forward-looking profitability, cost of risk, and capital adequacy metrics.
Related sector dynamics
Other lenders in the motor finance space, such as Close Brothers, have also faced volatility in reaction to the broader mis-selling saga. Some specialists, like Secure Trust, have issued profit warnings tied to the performance of their car finance divisions. In contrast, firms operating in both motor and property finance, like S&U, reported steadier results, highlighting the varied impact of mis-selling across different financial niches.
Bottom line
As Lloyds and other lenders await further details from regulators and the proposed settlement schemes, the market remains focused on the scale of potential provisions. A larger-than-expected hit would influence near-term earnings and capital planning, even as the sector seeks to restore customer trust and regulatory clarity.
