Lloyds, a major banking institution, has allocated £450 million to address the potential expenses associated with an investigation into car finance deals by the UK's financial regulator. Last month, the Financial Conduct Authority (FCA) initiated an inquiry into whether individuals were overpaying for cars.
This investigation focuses on brokers who arranged car financing and earned commission based on the interest rates set for customers. Lloyds disclosed this provision alongside announcing a significant increase in annual profits.
The bank said pre-tax profits jumped to £7.5 bn last year, which was higher than expected and up 57% from the year before.
Last month, the FCA declared its intent to investigate potential compensation owed to individuals who suspect they were overcharged for car loans. Lloyds is perceived to be the most vulnerable among major banks to such claims, given its ownership of one of the UK's leading motor finance providers, Black Horse.
Termed discretionary commission arrangements, certain lenders permitted car dealers to modify interest rates on loans, leading to increased commission. Essentially, higher interest rates translated to higher commissions for dealers.
As a result, these deals created an incentive for brokers to increase how much people were charged for their car loan. In 2021, the FCA banned these arrangements, saying it would collectively save drivers £165m a year.