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Lloyds (LLOY.L) has revealed it has set aside £1.2 billion to cover potential compensation costs for motor finance commission arrangements, as the bank’s annual profit slid by a fifth.
An additional £700 million provision taken in the final three months of the year adds to the £450 million already confirmed last year.
The banking group is exposed to the market through its brand Black Horse, which is one of the biggest car finance providers in the UK.
So-called hidden commission arrangements between car dealers and borrowers are the subject of a major review by the UK’s financial watchdog, as well as landmark court cases.
In its annual results, Lloyds reported a pre-tax profit of £6 billion for 2024, a fifth lower than the £7.5 billion generated the prior year, and coming in below analysts’ expectations.
Profits were weighed down by the group generating less income last year, spending more on business expenses, and putting more cash aside.
Its share price nonetheless shot up 6% on Thursday after the bank said it had cut costs and was handing out more cash to shareholders.
Lloyds said the extra £700 million provision for motor finance was taken in light of a court judgment on the issue in October.
That found it was unlawful for car dealers to receive commission on motor finance from lenders without a customer’s informed consent.
The decision opened the door for a potential fresh wave of complaints from consumers who think they may have been mis-sold car finance in previous years.
Lloyds’ chief executive Charlie Nunn said investors were “concerned” about the issue because the ruling “seems to be at odds with 30 years of regulation, and that creates a problem in the minds of investors”.
“Not just for this sector, not just for the financial services sector, but actually a broader investability question in the UK.
“Clearly significant uncertainty remains around the final financial impact,” Mr Nunn said, adding: “In this context we welcome the expedited Supreme Court hearing at the beginning of April.”
He stressed that the bank is comfortable with the amount it had set aside for the issue, which was its “best estimate” of what the impact could be.
“Of course the ultimate financial impact might be lower or it might be higher than that – we’ll have to see how things unfold,” William Chalmers, Lloyds’ finance chief said.
The total £1.15 billion is the largest sum compared with three of the UK’s other major lenders – Santander (BNC.L), Barclays (BARC.L) and Close Brothers (CBG.L) – who have all revealed their own reserves in recent weeks.