Lenders warn of bigger hit to finances from £11bn car loan compensation plan

The UK’s biggest car finance lenders have warned over a heavier hit to their finances as the sector prepares to foot a bill of £11 billion under a watchdog’s proposed compensation scheme.

Lloyds Banking Group and Close Brothers both said they were expecting to have to put aside more money to cover costs related to the mis-selling saga.

Shares in the lenders were falling on Thursday as a result.

Close Brothers’ share price tumbled by around a 10th in the afternoon after issuing a statement to investors.

The company, which has a big motor finance business, said its £165 million existing provision would likely not be enough if the Financial Conduct Authority’s (FCA) scheme goes ahead as planned.

It told investors there was “uncertainty in relation the outcome of the consultation” but that it was preparing for a “material increase” to its reserves.

Earlier, Lloyds also warned over a possible “material” increase to its existing £1.2 billion provision.

Shares in Lloyds were slipping by around 2% on Thursday afternoon.

Meanwhile, Santander will also be reviewing the consultation, having previously set aside £295 million for the issue.

Barclays, which has a smaller share of the market, has made an £80 million provision.

Some 14 million car finance agreements are due compensation under the FCA’s proposed scheme.

This is because motor firms broke the law and its rules when they sold loans to people between 2007 and 2024, by not properly disclosing information to customers about commission arrangements.

This meant people were treated unfairly and potentially not given a fair deal.

The regulator estimated that the industry could foot a bill totalling £8.2 billion worth of payouts, based on around 85% of eligible customers taking part in its scheme.

This rises to £11 billion once the cost of implementing the scheme and doing the work is taken into account.

It marks a significant cost for lenders involved in the issue – of which there are about 30, making up around 89% of the car finance market, that the FCA is focused on.

Nevertheless, the anticipated total bill comes in at the lower end of the £9 billion to £18 billion range that the regulator had previously estimated.

Victoria Scholar, head of investment for Interactive Investor, said: “Lloyds was a significant player in the motor finance mis-selling scandal alongside other lenders like Santander, Barclays and Close Brothers.

“Earlier this week, shares in Lloyds rose after the FCA said the industry would need to pay out £11 billion, which was better than expected.

“However, today’s update from Lloyds raises concerns that the lender is still likely to suffer a significant financial hit with some analysts pencilling in a 30% higher figure at around £1.5 billion.

“Developments from the mis-selling scandal will continue to be an overhang for the bank and other implicated lenders in the sector.”