The scandal over mis-sold car finance is intensifying after Lloyds Banking Group put aside £450m to cover possible costs and compensation.
Lloyds is the first of the major motor finance companies to provide a contribution for the Financial Conduct Authority inquiry into car loans. This is likely to fuel speculation about the industry’s potential for a large redress bill.
Close Brothers, a merchant bank that provides vehicle financing, canceled its dividend last week to boost its balance sheet in light of the FCA investigation announced by the watchdog last month.
William Chalmers (Lloyds’ chief finance officer) said that although the provision disclosed by the lender in its annual results on Friday was their “best estimate” of the impact it could suffer the actual financial impact may be higher or lower.
Jefferies stockbrokers has forecast that Lloyds could face a £1.8billion liability from the regulatory investigation, while RBC Capital Markets has predicted a £2.5billion blow. The analysts at KBW have told their clients that it is unlikely the £450m charge for Lloyds will be the last word.
The provision is intended to cover the bank’s legal and operational expenses as a result of the FCA’s work, as well as any possible compensation. Chalmers stated that it is “safe to assume” that the £450million figure includes each component.
The FCA inquiry, which reviews commission arrangements for financing deals made between April 2007 to January 2021, has sparked speculation that it could lead to a scandal of the same scale as the Payment Protection Insurance (PPI)affair, in which banks were forced into paying out about £50 billion on costs and compensation. Jefferies forecasts that the motor finance inquiry could result in a hit to the industry of £13 billion.
In 2011, it was Lloyds who broke ranks with the other lenders fighting compensation, and declared that paying compensation to customers was the “right thing to do”.
The bank charged £3.2 billion to cover compensation costs for PPI. The bank’s final bill was around £22 billion.
Charlie Nunn, the successor to Horta-Osorio, tried to downplay comparisons with PPI, saying: “We believe this is a completely different situation.”
He said that vehicle loans are “a very different service from some previous remediations”, in part because financing has become the most popular way to buy cars over the past few years.
Nunn said, “The number of customers has been materially reduced compared to some previous remediations.” He also stated that the average length of time a customer had car finance was shorter.
Lloyds executives refused to reveal how many customers it served on motor finance in the 14 years under review or the size of the loans that were extended. The bank’s motor financing loan book is worth more than £15 billion.
FCA has banned the use of discretionary commissions on car loans as of January 2021. Two recent Financial Ombudsman Service decisions triggered the FCA’s market-wide investigation.
The ombudsman determined that Barclays Partner Finance and Lloyds’ Black Horse had both treated two customers “unfairly”. This was due to their discretionary commission agreements. The regulator, which has already received complaints about motor finance providers and is expecting a rise in complaints as a direct result of the ombudsman’s decisions, began its investigation to determine if there was widespread misconduct. The regulator will inform the industry of its findings by the third quarter.
Chalmers stated that Lloyds believes it has “complied with all relevant regulations”
He said: “So far, we have had a financial ombudsman’s judgment and a number of county court cases. Most of them were decided in our favor.”
Lloyds has reflected the motor finance charge in its bonuses. In its annual report, it revealed that the motor finance charge “includes” the group bonus pool for last year, which dropped to £384 from £446 in 2022.
Close Brothers said last week its board decided that “it is not currently required or appropriate” to recognise a provision because “the impact of the FCA inquiry cannot be reliably assessed at this time”. Close Brothers’ shares fell sharply after its board decided to cancel its dividend. This will save the company about PS100million this year.
Lloyds Banking Group forecasts that the benefits it received from rising interest rates would diminish after its profits surged last year as a result of higher borrowing costs.
The annual results show that the pre-tax profit at Britain’s largest domestic lender increased by 57 percent year-on year to £7.5 billion in last year. This was better than analysts’ expectations of £7.4billion.
Lloyds has announced that it will return £2 billion to stock market investors through a share purchase. The final dividend was 1.84p per share, equivalent to £1.17bn. This resulted in a 2 3/4p or 6.2% increase to 46p. Charlie Nunn, Lloyds’ chief executive, received almost £3.7million, a slight decrease from £3.8million in 2022.
Lloyds was buoyed up by higher interest rates. This allowed the bank’s margins to increase by passing rate increases on to borrowers quicker than its depositors. The bank’s net interest margin (which measures the difference between how much it charges for savings and what it pays to borrowers) climbed from 2.94 percent in 2022 to 3.11 percent last year.
Expectations that the Bank of England would cut rates in this year’s budget, competition on the mortgage market and the move of savers to higher interest account will all push margins down over the next few months.
Lloyds expects to report a profit margin greater than 2,9% for this year. William Chalmers noted that it was “quite a material reduction” from last year. Its margin fell from 3.08 percent in the third quarter of last year to 2,98 percent in the fourth.
Chalmers stated that the Bank of England, which is considered to be a bellwether of the economy, has made “modestly positive revisions” to its outlook, partly due to its forecasting that the Bank of England will cut its base rate from 5,25 percent to 4.5 percent by the end of this year.
Lloyds expects the house price to drop by just 2.2% this year. This is down from their previous forecast of 2.4% in its third quarter results. It maintained its forecast that the economy would grow by 0.5% this year.