Lloyds Banking Group has been forced to put aside a further £700m for potential compensation over the ballooning car loan commission scandal, in a move that knocked its annual profits by 20%.
The latest provision brings the sum it will hold back for payouts to almost £1.2bn. RBC Capital has estimated that the bank could ultimately be on the hook for up to £4.6bn.
“Clearly, significant uncertainty remains around the final financial impact,” the Lloyds chief executive, Charlie Nunn, said.
The extra reserves weighed on the bank’s annual performance, pushing its pre-tax profits for the 12 months to December down 20% to just under £6bn, compared with £7.5bn last year.
Lenders have been grappling with the fallout of a shock court judgment in October that vastly expanded a Financial Conduct Authority investigation into motor finance commissions and sent compensation estimates soaring. The ruling determined that paying a “secret” commission to car dealers who had arranged the loans without disclosing the sum and terms of that commission to borrowers was unlawful.
Analysts at HSBC estimate that the collective bill for lenders could rival the payment protection insurance saga and reach more than £44bn.
However, two specialist lenders, Close Brothers and FirstRand, hope to overturn the ruling at a supreme court hearing, due to be heard from 1 to 3 April.
While Lloyds is not a party to the court case, it has the biggest exposure to car loans among the UK’s high street banks, and its share price has been roiled as investors have digested developments in the case.
The bank’s pay committee still granted the payout of a long-term bonus that pushed Nunn’s total pay package up 53% to £5.6m. That included £2.3m in salary, a £1.1m annual bonus and the payout of a £2m bonus that was granted in 2022. The company-wide bonus pool fell 4% to £368m.
Investors were shielded from the motor finance pain, having been granted a final dividend worth 2.11p a share, with Lloyds also announcing that it would buy back £1.7m of its own shares. Lloyds shares closed nearly 5% higher on Thursday.
Lloyds put aside £450m in February last year, months before the court of appeal judgment. Nunn said he and colleagues at Lloyds “welcome the expedited supreme court hearing at the beginning of April”.
Nunn and fellow bank bosses had been hopeful that their payouts might be curbed after the chancellor, Rachel Reeves, applied to intervene in the supreme court hearing last month. That application urged judges to avoid handing “windfall” compensation to borrowers harmed by allegedly secret commission payouts.
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However, judges this week rejected her application, in a further blow to lenders such as Lloyds.
The bank’s executives said on Thursday that Lloyds had settled on its provision before the Treasury tried to intervene, adding that the government’s willingness to go out on a limb to back lenders in court was “quite unusual” but welcomed.
They also insisted that the money put aside to date reflected a review of all of its risks, given that some analysts are concerned that the court of appeal ruling could affect other products that use commission, including insurance. “It’s a complete view of this business in the timeline that goes back for every policy that we’ve looked at,” Nunn said.
While some analysts are predicting much larger payouts than Lloyds has put aside to date, the chief financial officer, William Chalmers, suggested that those estimates may be overblown.
“When they come out with very large numbers, effectively what they’re doing is turning all of the dials in all of those uncertainties to the worst outcome … That obviously produces a bigger number than we have provisioned for,” he said. “But on the basis of legal advice, it’s not clear to us that all the dials should be turned to those readings.”
