Lloyds is the first bank to set aside hundreds of millions of pounds in case it has to compensate car finance customers, amid a major investigation into whether people overpaid on their loans.
The banking group has set aside £450 million to cover potential costs relating to the issue. Now, we take a look at what is being investigated and what could happen next for banks and consumers.
What is the issue and why is it being investigated?
The UK’s financial regulator, the Financial Conduct Authority (FCA), launched a review last month into historic commission arrangements in the motor finance market. It said it followed a high number of complaints from customers to car finance firms.
In January 2021, the FCA banned selling practices known as discretionary commission arrangements. It stopped lenders allowing brokers, including car dealers, to increase interest rates on car loans so they get more commission. Research suggested it led to higher finance costs and was unfair on consumers.
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What could happen next?
The FCA said if it finds consumers have lost out because of widespread misconduct, it will make sure they get compensation in an orderly and efficient way – indicating it could set up a formal redress scheme. The watchdog is expected to set out its next steps by the end of September.
MoneySavingExpert.com has created a tool to generate a template email for people who think they might have been overcharged interest on a car, van or motorbike bought on finance before January 28, 2021. Consumer champion Martin Lewis, who founded the website, said some 262,500 complaint emails were sent after just one full day of the tool being launched.
What has Lloyds said about the issue?
Lloyds has come into the spotlight because it is one of the biggest motor finance providers in the UK through its brand Black Horse. The bank said it is too early to say what the scale of any potential redress could be, and that it welcomed the regulator’s investigation to get clarity on the issue.
Matt Brizman, an equity analyst for Hargreaves Lansdown, said the £450 million charge is “less than some had feared but there will be question marks around how Lloyds has come to that figure”. He added: “Lloyds has been honest in saying the outcome of the review is largely unknown. What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.”
Are other banks involved?
Santander said it had received “a number of county court claims and complaints” about the issue following the FCA’s review, and it is possible it could receive more. But the bank said: “In view of the inherent uncertainties, it is therefore also not possible to estimate the extent of any financial impact.”
Barclays, which is less exposed to the car finance market, acknowledged the review in its full-year results published this week.Its finance director Anna Cross said because of the low number of customer complaints it had received, and uncertainty about the FCA’s final decision, the bank decided not to set aside a provision at this time.
Alex Neill, co-founder of consumer rights group Consumer Voice, said: “All car finance providers that used discretionary commission should be setting aside money to give customers back what they’re owed. It’s only right that all of the people who have been charged too much for their loan are compensated.””
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