Lloyds Banking Group profits have been sent plunging by more than a third by the car loans commission scandal, as the lender steels itself for a surge in compensation payouts to drivers.
The high street bank took the 36% hit in the third quarter after putting aside a further £800m to cover the prospective costs of a redress scheme proposed by the Financial Conduct Authority (FCA).
The additional charge, announced last week, brings Lloyds’ total compensation pot to £1.95bn.
Lloyds is the UK’s biggest car lender through its Black Horse division and is expected to foot the largest bill among its peers.
The additional charge sent Lloyds’ pre-tax profits down 36% to £1.17bn in the three months to the end of September. That was down from £1.8bn during the same period last year.
The FCA’s scheme, which is currently out for consultation, could end up costing car lenders a combined £11bn, as the regulator seeks to draw a line under 14m historic car loan contracts that may be deemed unfair because of controversial commission arrangements with car dealers.
However, while the FCA is hoping to start payouts next year, it faces the looming threat of having its proposed compensation plans challenged in court by aggrieved lenders.
When asked whether Lloyds was keeping the door open to taking the regulator to court, Lloyds’ chief financial officer, William Chalmers, said it was “just far too early to speculate” on the next steps.
At the moment, he said the bank was focused on “constructive dialogue” with the FCA over disputed proposals for the scheme. “We do intend to compensate customers appropriately where harm has been suffered. That’s an absolute commitment,” Chalmers said.
However, Lloyds is concerned that the scheme would end up compensating too many customers, roughly 44% of car loans issued since 2007. “We think that is in extent of what can be appropriately described as unfair.”
Lloyds also claims that the proposals “do not align” with the supreme court ruling in August that led the FCA to launch plans for a mass compensation scheme. Chalmers said the FCA was proposing to compensate drivers in cases where the commission paid to car dealers for arranging the loans was not clearly disclosed to borrowers. “For example, the supreme court did not determine that non-disclosure equals unfair.”
He also said the FCA’s calculations on how to determine compensation payouts “is very unclearly linked to harm”.
Chalmers added: “We will contribute to the FCA consultation process and hopefully make progress in a constructive dialogue for the FCA to get to an appropriate and proportionate outcome.”
Lloyds’ latest drop in profits comes a day after its high street rival Barclays announced it was setting aside a further £235m to cover its own car finance compensation bill, taking its total compensation pot to £325m. Barclays no longer provides car finance but is dealing with the fallout for the remaining loans on its books.
