Lloyds Banking Group PLC's (LSE:LLOY) comments that it may have to make "material" extra provisions for a motor finance compensation scheme may send ripples around the industry, analysts at Shore Capital warned.
The FTSE 100-listed lender had already set aside £1.2 billion ahead of the ruling from the Supreme Court in August, which was followed by an initial estimate from Financial Conduct Authority that a redress scheme may cost between £9 billion and £18 billion.
Today's statement from Lloyds, whose Black Horse arm was the largest player in the vehicle lending sector, came a day after the FCA launched a consultation on the scheme, where it stated that it now expected the costs of a redress scheme to be around £11 billion, comprising an estimated £8.2 billion in compensation and £2.8 billion in costs.
Analyst Gary Greenwood at Shore Capital said the statement from Lloyds "represents a significant change in stance" from the management team, "given that it has stated on multiple occasions post the handing down of the Supreme Court ruling on 1 August 2025 that it did not feel that material extra provisions would be required".
He noted that there was a significant gap between the £11 billion total cost the FCA has suggested and the circa £2 billion of provisions the industry has set aside, "which would suggest significant further provisions may be required by industry participants".
While he said a large proportion of the exposure is likely to reside outside of the banking industry, "this would not explain all the difference, in our view".
As Lloyds is the largest bank operating in the UK motor finance industry, "its comments are likely to have a ripple effect", he said.
Other lenders in the space, Close Brothers Group PLC (LSE:CBG) and Secure Trust Bank PLC (LSE:STB) saw their shares fall 10.4% and 18.3%, though the latter reflected a profit warning as well. .
South African lender FirstRand Bank, which also operated in the UK, yesterday said the FCA’s proposed redress scheme "appears to have moved beyond the group’s expectations of what can be considered proportionate or reasonable” and that “the presumptions of unfairness in the scheme in its current form does not appear to be applying the legal clarity provided by the recent UK Supreme Court”.
Greenwood said he expects the FCA’s proposal will to "spark significant industry retaliation", especially around the cut-off used to determine less severe cases and the use of the FCA’s calculations based on an APR deduction to calculate potential harm and customer losses.
"Consequently, it is possible the FCA’s criteria for assessing this issue could watered down / amended following a period of consultation which is due to conclude on 18 November 2025."
As Lloyds generates so much cash it is "more than capable of absorbing material further motor finance commission redress provisions, albeit these could impact negatively on the size of any potential future share buyback", Greenwood said.