By Tommy Reggiori Wilkes and Raechel Thankam Job
LONDON (Reuters) -Britain’s Lloyds Banking Group will likely need to set aside more cash to cover the cost of compensating motor finance customers, the bank said on Thursday after the UK regulator this week proposed a redress scheme for the mis-selling scandal.
The UK lender, which is a major player in car finance and has already provisioned about 1.15 billion pounds ($1.54 billion), said the amount may be material and its shares were down 2.5% by 1100 GMT, against a 0.25% drop in the FTSE 100.
Shares in other exposed lenders, such as Close Brothers and Barclays, also fell. Analysts at Shore Capital said Lloyd’s warning “was likely to have a ripple effect” across the sector.
Banks have in total put aside more than 2 billion pounds to cover compensation, but analysts note there is a significant gap between that and the 11 billion pound bill the sector now faces, with “captive lenders” – subsidiaries of vehicle manufacturers – facing about half the liabilities and banks the rest.
The Financial Conduct Authority said on Tuesday that the motor finance industry could pay about 11 billion pounds to compensate consumers for mis-sold car loans, making it one of the costliest consumer scandals to hit British finance.
The FCA’s new estimate was lower than initially feared and shares in Lloyds had risen on Wednesday.
Analysts at Citi and Jefferies said this week they expected Lloyds would need to increase its provisions to about 1.5 billion pounds following Tuesday’s estimate by the FCA.
Citi said on Thursday that in a “worst case scenario” that could rise to around 1.85 billion pounds.
“Uncertainties remain outstanding on the interpretation and implementation of the proposals but based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which may be material,” Lloyds said on Thursday, adding that it continues to assess the implications of the market regulator’s consultation paper.
The redress scheme is designed to compensate consumers for around 14.2 million motor loan deals that broke laws and regulations between 2007 and 2024 by failing to adequately disclose commission and contractual ties between lenders and car dealerships.
The final cost to lenders will depend on how many impacted consumers seek compensation, with the FCA estimating a take-up of 85%.
($1 = 0.7482 pounds)
(Reporting by Tommy Reggiori Wilkes and Raechel Thankam Job in Bengaluru; Editing by Mrigank Dhaniwala and Susan Fenton)
