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Lloyds Banking Group has warned that it may need to set aside a “material” amount of additional funding to cover the costs of the UK watchdog’s proposed motor finance compensation scheme.
Lloyds already has a provision of £1.2bn for mis-selling issues.
But it said it was likely this would not be enough, after reading proposals published by financial conduct authority (FCA) on Tuesday.
Lloyds has a significant contribution to the car finance industry through its Black Horse business.
The bank told investors: “Uncertainties remain over the interpretation and implementation of the proposals, but based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which could be significant.
“This is subject to ongoing analysis and review of the proposals. The Group will continue to update the market when appropriate.”
Around 14 million car finance agreements are due to be compensated under the FCA’s proposed scheme.
This is because motor companies broke the law and its regulations when selling loans to people between 2007 and 2024, and did not properly inform customers about the commission arrangement.
This meant that people were treated unfairly and potentially not given a fair deal.
The regulator estimated that the industry could pay a total of £8.2 billion based on about 85% of eligible customers taking part in its scheme.
This rises to £11 billion once the costs of implementing and working the scheme are included.
Gary Greenwood, an equity analyst at Shore Capital, said he estimates the motor finance industry has made provisions totaling about £2bn, “suggesting that significant additional provisions may be required”.
shares Lloyds were falling on Thursday morning after the update, and were down about 3.5% shortly after the start of trading.
Its shares, along with those of other major motor lenders, were rising on Wednesday amid an initial reaction to the FCA softening the estimated total cost to the industry under its plan.
Lenders were previously told the total cost to the industry could be between £9 billion and £18 billion.