Lloyds Banking Group has nearly tripled the amount it is setting aside to cover the car finance mis-selling scandal to £1.2bn, knocking its profits for the year.
It is setting aside an extra £700m to cover potential compensation payments, on top of £450m earmarked earlier.
Lloyds, and other providers of finance for car loans, are under fire for not being clear enough over commission paid to car dealers, with millions of motorists potentially in line for compensation.
However, group chief executive Charlie Nunn told the BBC the issues around motor finance were not comparable to the PPI mis-selling scandal, which cost the bank billions.
Mr Nunn said the provision made to cover potential car finance compensation payments was the bank’s “best guess at this stage” and that the bank’s overall performance was strong.
“Underlying performance has been really robust and we’ve seen really good growth in the business,” he said.
However, the bank reported a pre-tax profit of £5.97bn, down from £7.5bn a year earlier, as the UK economy faltered and interest rates came down.
In April, the Supreme Court will rule on the question of whether people taking out car loans were properly informed over how commission was paid, possibly leading them to be charged more.
About two million new and second-hand cars are sold using finance agreements every year, with customers paying an initial deposit and then a monthly fee, including interest.
Banks and other lenders may now be in line to pay compensation over some deals, particularly before rules were changed in 2021.
Lloyds, which owns motor finance company Black Horse, faces a potential hefty bill.
“While you could argue the provision is overly cautious, Lloyds holds the largest exposure of any major UK bank, and the outcome remains uncertain,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.
However Lloyds share price rose following its latest results, reflecting an underlying “robust performance”, he said.
Lloyds faced the largest bill following the mis-selling scandal around payment protection insurance (PPI) a decade ago, which eventually cost UK banks tens of billions of pounds.
Customers were compensated after insurance policies – which were intended to cover loan payments if, for instance, they fell ill – were sold very widely, often to people who did not want it or did not need it.
The total paid out by Lloyds over the PPI mis-selling saga stood at £21.9bn in 2019.
