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  • Lloyds owns Black Horse, which is Britain’s biggest motor finance provider 

Lloyds Banking Group has set aside £450million to cover the potential costs of a regulatory probe into  motor finance commission arrangements. 

Some analysts estimate the bank’s potential costs could reach £2billion, while others think the total could be considerably more. 

Lloyds chief financial officer William Chalmers said the provision was the bank’s ‘best estimate’ and declined to comment on analyst models.

Lloyds owns Black Horse, which is Britain’s biggest motor finance provider.  

Analysts at RBC Capital Markets have estimated the sector’s total compensation bill could reach £16billion, making it the costliest consumer banking scandal since misselling of payment protection insurance. 

Last month, the Financial Conduct Authority launched a probe into whether people had been paying too much for car finance. 

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Brokers who arranged car financing earned commission on the interest rates that they set for customers.

This incentivised brokers to charge customers higher rates regardless of other factors, such as the loan agreement’s length, a customer’s credit score or the loan’s value. 

Earlier this month, financial services group Close Brothers Motor Finance scrapped dividend payouts and warned of ‘significant uncertainty’ regarding the outcome of a probe into the motor finance industry.

Car financing: Brokers who arranged car financing earned commission on the interest rates that they set for customers

Aidan Rushby, founder and chief executive of Carmoola, said: ‘This move by Lloyds Banking Group, which operates Black Horse motor finance, reads as a tacit acknowledgement of the scale of the car finance misselling problem.

‘The sizeable reserve that has been set aside to deal with compensation claims underscores the serious concerns surrounding past commission practices in the car finance industry, and highlights the systemic problems that tipped the balance too far away from consumer interests, leading to unfairness and poor value.’

He added: ‘The FCA’s intervention is welcome, and we are hopeful that it will lead to significant industry-wide changes, and for all financial institutions to align themselves with the principles of fairness and transparency.’

Lloyds sees profits rise sharply

Lloyds reported an underlying pre-tax profit of £7.8billion for the past year. This was up from the previous year and higher than forecasted.

Underlying net interest income came in at £13.8 billion, up 5 per cent on the previous year. Many banks and building societies have been benefiting from higher interest rates. 

Loans and advances to customers fell by £5.2billion to £449.7billion. This included the securitisation of £2.5billion of legacy retail mortgages in the first quarter and £2.7billion of retail unsecured loans in the fourth quarter.

In charge: Charlie Nunn is the chief executive of Lloyds Banking Group

Customer deposits for the year reached £471.4billion, down by £3.9billion on a year earlier, and including a £11.3billion reduction in retail current accounts.

The group, which also encompasses Halifax, Bank of Scotland and Scottish Widows, announced a final dividend of 1.84p and a share buyback of £2billion. 

Lloyds set aside £308million to cover potential unpaid loans, well down on £1.5billion a year earlier. 

The lighter charge for bad loans was in part thanks to a writeback worth £541million, after a single borrower repaid debts in full and the bank made slight improvements to its forecasts for the UK economy.

The group set out muted performance guidance for the year ahead, with net interest margin, a key measure of underlying bank profitability, forecast to fall to 2.9 per cent from 3.11 per cent this year.

Will the FCA’s motor finance probe lead to PPI-style payouts? 

A regulatory probe into the historical sale of loans by the UK motor finance industry could mirror the PPI scandal and result in billions of pounds of compensation.

Some analysts fear the surprise Financial Conduct Authority review, launched last month, represents a ‘powder keg’ that threatens the future of the country’s motor finance sector.

> Read more here  

That in turn drove guidance for returns for 2024 to 13 per cent, down from 15.8 per cent in 2023, before recovering to 15 per cent by 2026.

Underlying pre-tax profits for the final quarter of the year reached £1.8billion. Quarterly revenues fell year-on-year from £4.4billion to £4.2billion.

Charlie Nunn, the group’s chief executive, said: ‘The Group delivered a robust financial performance, meeting our 2023 guidance, driven by income growth, cost discipline and strong asset quality. This performance enabled strong capital generation and increased shareholder distributions.

‘2023 was a critical year in building towards the ambitious strategy we announced two years ago, as we look to grow our business and deepen relationships with our customers. 

‘As demonstrated in our recent strategic seminars, we have made significant progress and are on track to meet our 2024 and 2026 strategic outcomes, helping us build towards higher and more sustainable returns.’

Lloyds also announced it had appointed former Banco Santander executive Nathan Bostock to its board, after deputy chairman Alan Dickinson said he would step down following nine years of service.

Bostock was chief executive officer of the Spanish lender’s UK arm from 2014 until 2022.

Lloyds shares were down 0.31 per cent or 0.14p to 43.16p on Thursday, having fallen over 15 per cent in the last year. 

Russ Mould, investment director at AJ Bell, said: ‘The latest numbers from Lloyds are relatively solid but they include a nasty detail which may be provoking some nervousness among investors.

‘Results were pretty much in line with what the market expected, with profits coming in slightly ahead of forecasts. Though this is what you would probably describe as a low-quality beat, supported as it was by a single large creditor paying back a chunk of debt.

‘The outlook both in the short and medium term was broadly unchanged but the fly in the ointment is the provision relating to a regulatory probe into motor finance.

‘Anyone with memories of the PPI scandal will have doubts over whether the amount set aside so far will represent the final cost of dealing with this issue. 

‘Time will tell if £450million represents the tip of the iceberg or an appropriately conservative assumption. Lloyds admits there is considerable uncertainty on this front.

‘At best it represents an unhelpful distraction from chief executive Charlie Nunn’s strategy for the company of boosting its digital banking footprint and bolstering its wealth and corporate finance arms.’

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