Lloyds Banking Group PLC (LYG.US) announced on Thursday that it will likely need to make additional provisions to compensate customers who were misled into purchasing car loans, following the UK financial regulator's launch of a car loan mis-selling compensation scheme. Following this news, Lloyds Banking Group PLC shares fell more than 2% in pre-market trading on Thursday.
In a filing, Lloyds Banking Group PLC stated that this amount could have a "material impact." The bank has already set aside £11.5 billion (approximately $15.4 billion) to cover costs related to refunds.
The document noted: "While there remains uncertainty regarding the interpretation and implementation of the proposals, based on our preliminary analysis and the characteristics of the proposed scheme, additional provisions may be required, and this amount could have a material impact."
Lloyds Banking Group PLC stated in the document: "The above remains subject to further confirmation following ongoing analysis and review. The Group will continue to update the market on developments at appropriate times."
This compensation scheme continues to advance following a favorable ruling for lending institutions by the UK Supreme Court in August. The court ruled that banks only need to pay compensation when "the most serious misconduct" is discovered.
Subsequently, the Financial Conduct Authority (FCA) spent weeks consulting with lenders, law firms, and other industry participants to discuss how to compensate consumers who were misled into purchasing car loans.
The FCA announced this week that it currently expects some of the UK's largest car loan providers to pay approximately £8.2 billion to compensate affected customers. To launch the refund program, lenders will also bear approximately £2.8 billion in additional costs, bringing the total cost to around £11 billion.
The regulator noted that this figure is below the midpoint of the previously provided forecast range. Additionally, the FCA currently expects most consumers to receive an average compensation of £700, lower than the previously predicted level of under £950.
Analysts at Keefe, Bruyette & Woods (KBW) predict that based on the FCA's latest announcement, Lloyds Banking Group PLC may need to provision a total of £1.65 billion. This means the bank would need to add approximately £500 million more in provisions, though this is still better than KBW's previous expectation of £2 billion in total provisions.