Lloyds Banking Group has warned the car finance compensation scheme could hammer the bank with costs of nearly £2 billion, after setting aside an additional £800 million for the mis-selling scandal. The banking giant revealed it will be fighting the watchdog’s proposed scheme, claiming it vastly overestimates the compensation customers require.
This comes after the UK regulator, the Financial Conduct Authority (FCA), unveiled details of its proposed compensation scheme last week. The FCA declared payouts were owed on approximately 14 million unfair deals, with an average of roughly £700 each.
After examining the details, Lloyds revealed it was anticipating a greater number of historical motor finance agreements would qualify for redress than previously anticipated. Lloyds’ extra £800 million provision takes the total value of its reserves earmarked for the issue to £1.95 billion, encompassing customer payouts and operational expenses.
The bank stated this reflected “the increased likelihood of a higher number of historical cases, particularly DCA (discretionary commission arrangement), being eligible for redress, including those dating back to 2007”.
The majority of car finance deals covered by the FCA’s scheme involve DCAs. This relates to schemes where brokers, including motor dealers, were permitted to inflate interest rates on vehicle finance deals to secure higher commission payments.
The FCA declared this practice unfair to consumers who may not have been adequately informed about such arrangements, thereby missing chances to negotiate or secure better terms. Nevertheless, Lloyds argued it disputes the FCA’s calculations accurately represent the genuine losses suffered by UK consumers.
“The group remains committed to ensuring customers receive appropriate redress where they suffered loss; however, the group does not believe that the proposed redress methodology outlined in the consultation document reflects the actual loss to the customer,” Lloyds informed investors.
“Nor does it meet the objective of ensuring that consumers are compensated proportionately and reasonably where harm has been demonstrated.”
Lloyds contends consumers could receive more than 100% commission back under the suggested framework.
“The group will make representations to the FCA accordingly,” it added.
Motor manufacturer BMW is reportedly seeking discussions with the Treasury regarding its reservations about the sector-wide compensation programme, according to The Times.