Lloyds Banking Motor Finance Misselling Provision Soars to £11 Billion Pounds

Lloyds Banking Group has significantly increased its compensation provision for potentially mis-sold motor finance to £1.1 billion following a landmark court ruling, forcing the FTSE 100 lender to set aside an additional £700 million.

The banking giant, which owns Britain’s largest car loans business, revealed the escalating crisis in the motor finance market through its latest financial report. Industry analysts suggest the sector could face tens of billions in consumer redress, raising serious concerns about the UK’s investment landscape.

Charlie Nunn, Lloyds’ chief executive, expressed worries about the broader implications for UK investment attractiveness. The controversy ignited in January 2024 when the Financial Conduct Authority (FCA) launched an investigation into the car loans market, initially prompting Lloyds to establish a £450 million provision.

The October Court of Appeal judgement against Close Brothers and MotoNovo Finance dramatically expanded the scope of the issue. The ruling determined that any undisclosed commission arrangements with borrowers were unlawful, creating widespread implications for the sector.

William Chalmers, Lloyds’ chief financial officer, acknowledged significant uncertainties surrounding the bank’s motor finance liability, with some analysts projecting potential costs exceeding £4 billion. The provision contributed to a 20% decline in the bank’s full-year pre-tax profits, dropping to £5.97 billion.

Despite these challenges, Lloyds maintained its commitment to delivering a return on tangible equity of at least 15% by 2026. The bank announced plans to return up to £1.7 billion to investors through share buybacks and declared a final dividend of 2.11p, equivalent to £1.28 billion, demonstrating resilience amid regulatory pressures.

The banking net interest margin at Lloyds fell to 2.95% in 2024 from 3.11%, influenced by the Bank of England’s interest rate adjustments. The Supreme Court is scheduled to hear appeals from Close Brothers and MotoNovo Finance in April, with the outcome potentially reshaping the UK’s regulatory environment.