Mortgage giant releases results – but despite poor figures, shares rise
Lloyds Banking Group has reported a pre-tax profit of £6 billion – falling short of analysts’ estimates of £6.5 billion. Last year, the bank posted £7.5 billion.
The mortgage giant has bolstered its provisions for potential motor finance mis-selling claims, setting aside an additional £700 million, pushing its total contingency fund beyond £1.15 billion in what chief executive Charlie Nunn has called “a best guess at this stage”. The move comes as the financial sector faces mounting legal challenges over historic commission arrangements in car finance deals, a controversy that could cost the industry tens of billions in consumer redress.
Read more: Lloyds whacked with £1 billion bill after tribunal ruling
A growing industry-wide crisis
The issue stems from a Court of Appeal ruling last October that significantly expanded lenders' potential liability in discretionary commission arrangements (DCAs). These agreements allowed brokers to adjust interest rates on car loans, often without consumers’ full awareness, leading to inflated costs. The ruling, which directly affected Close Brothers and MotoNovo Finance, has sent shockwaves through the industry, prompting major lenders to reassess their exposure.
Lloyds, the UK’s largest retail lender and owner of Black Horse – Britain’s biggest motor finance provider – has been particularly affected due to its substantial £15.3 billion motor finance book. The additional provision was revealed in its annual results, where pre-tax profits fell to £5.97 billion from £7.5 billion the previous year.
“Remediation for the potential impact of the motor finance commission arrangements continues to overhang the stock,” said Richard Hunter, head of markets at Interactive Investor. “This latest provision had a material effect on fourth-quarter profit.”
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Other major lenders have also been forced to act. Santander has earmarked £295 million, while Close Brothers has set aside £165 million. Industry analysts estimate total consumer claims could exceed £30 billion, making this scandal comparable to the infamous £50 billion payment protection insurance (PPI) crisis.
Legal battle and regulatory uncertainty
Despite the financial sector’s efforts to mitigate damage, uncertainty looms. The Supreme Court is set to hear appeals from affected lenders in April – a case being closely watched by both banks and regulators. The Treasury attempted to intervene, warning that an adverse ruling could prompt banks to withdraw from the car finance sector, restricting consumer access to credit. However, the Supreme Court rejected its application, leaving the industry in a precarious position.
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“The Financial Ombudsman Service plays a vital role in protecting consumers, but there is a clear case for modernising its processes,” a source close to Chancellor Rachel Reeves stated, reflecting government concerns over the flood of complaints and potential economic disruption.
The Financial Conduct Authority (FCA), which banned DCAs in 2021, has been monitoring developments closely. The regulator has temporarily paused some compensation claims as it reassesses the framework governing car finance agreements – a move designed to balance consumer redress with financial stability.
Lloyds navigates financial and workforce challenges
Beyond its growing legal liabilities, Lloyds is also restructuring its operations amid an increasingly challenging economic landscape. The bank has placed 6,000 jobs under review as part of a broader effort to modernise its workforce and accelerate digital banking initiatives. While 1,200 new roles will be created, uncertainty remains over how many employees will transition into these positions.
Read more: Lloyds Banking Group puts another 6000 jobs 'under review'
This restructuring aligns with Lloyds’ ongoing cost-cutting strategy, which has included the closure of 136 branches and major office relocations. Like many of its peers, the lender is grappling with shifts in consumer banking habits and rising competition from fintech firms.
Despite these headwinds, Lloyds’ stock has bounced back from its earlier falls, rising 1.75% after the latest financial disclosures. Investors appear to be taking a long-term view, factoring in the bank’s strong fundamentals even as it faces near-term volatility.
What’s next?
With billions in potential payouts at stake and regulatory scrutiny intensifying, the UK banking sector faces a crucial juncture. The upcoming Supreme Court hearing in April will likely be a defining moment for the industry, determining the extent of financial liabilities and shaping future lending practices.
For now, banks are bracing for impact, navigating legal complexities, and adjusting their financial strategies to weather what could be one of the most expensive scandals in recent financial history.
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