Lloyds Bank has put aside £450m to cover any potential fines and compensation for borrowers following the launch of an investigation into motor finance deals by the Financial Conduct Authority (FCA).

The regulator last month opened an investigation into whether consumers had been charged inflated prices for car loans.

In 2021, the FCA banned discretionary commission arrangements in the motor finance market, which removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance. According to the regulator, there have since been a high number of complaints from customers claiming compensation for commission arrangements prior to the ban.

Lloyds stated there is “significant uncertainty” as to the extent of any misconduct and the nature of any required remediation action and added that the financial impact could “materially differ from the provision”.

According to a report in The Guardian, however, some analyst estimates suggest the investigation into loan and commission arrangements struck between 2007 and 2021, and could end up costing Lloyds “upwards of £2bn”.

Lloyds revealed the remediation costs as part of its latest annual results, which showed that the bank’s pre-tax profits jumped to £7.5bn last year, a figure up 57% from the year before.

The bank’s profits have been helped by high interest rates over the last two years, which have allowed lenders to charge more on loans while not significantly increasing payouts to savers.

Group chief executive at Lloyds, Charlie Nunn, said the group had delivered a “robust financial performance” in 2023, driven by income growth, cost discipline and strong asset quality.

“This performance enabled strong capital generation and increased shareholder distributions,” Nunn added.

Equity analyst at Hargreaves Lansdown, Matt Britzman, said that Lloyds had delivered a “decent set of results” as well as a “confident medium-term outlook”.

However, he added that “question marks” remain around how Lloyds has come to arrive at the £450m figure for its motor finance remediation costs.

“Lloyds has been honest in saying the outcome of the review is largely unknown,” Britzman commented. “What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.”

---