Lloyds warns of bigger hit from UK motor finance scandal

By Tommy Reggiori Wilkes and Raechel Thankam Job

LONDON (Reuters) -Britain's Lloyds Banking Group will likely need to set aside more cash to cover the cost of compensating motor finance customers, the bank said on Thursday after the UK regulator this week proposed a redress scheme for the mis-selling scandal.

The UK lender, which is a major player in car finance, said the amount may be material and its shares were down 2.6% by 0815 GMT, against a 0.4% drop in the FTSE 100.

Lloyds has already provisioned about 1.15 billion pounds ($1.54 billion), the largest of any motor finance operator.

The Financial Conduct Authority said on Tuesday that the motor finance industry could pay about 11 billion pounds to compensate consumers for mis-sold car loans, making it one of the costliest consumer scandals to hit British finance.

The FCA's new estimate was lower than initially feared and shares in Lloyds rose on Wednesday.

On Thursday, shares in other motor finance players, Barclays and Close Brothers, also fell and were last down 1% and 2.6%, respectively.

Analysts at Citi and Jefferies said this week they expected Lloyds would need to increase its provisions to 1.5 billion pounds following Tuesday's estimate by the FCA.

"Uncertainties remain outstanding on the interpretation and implementation of the proposals but based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which may be material," Lloyds said on Thursday, adding that it continues to assess the implications of the market regulator’s consultation paper.

The redress scheme is designed to compensate consumers for around 14.2 million motor loan deals that broke laws and regulations between 2007 and 2024 by failing to adequately disclose commission and contractual ties between lenders and car dealerships.

The final cost to lenders will depend on how many impacted consumers seek compensation, with the FCA estimating a take-up of 85%.

Banks have put aside more than 2 billion pounds to cover compensation, but just under half the proposed liabilities will be borne by "captive lenders" - wholly or partly-owned subsidiaries of vehicle manufacturers, the FCA said. 

($1 = 0.7482 pounds)

(Reporting by Tommy Reggiori Wilkes and Raechel Thankam Job in Bengaluru; Editing by Mrigank Dhaniwala and Susan Fenton)