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Lloyds Banking Group has announced a £450 million provision for the potential impact of the FCA review into historical motor finance commission arrangements in its fourth quarter results.

The bank’s total provision for bad loans was £541 million, substantially higher than analysts’ predictions of £126 million, and a big increase on the £187 million set aside in the third quarter.

Lloyds has the biggest exposure to car loans of any high street bank, with a loan book totalling £15.3 billion as of the end of last year

Analysts at RBC Capital Markets have estimated costs and redress for complaints around discretionary commission arrangements related to lending made by Lloyds’ Black Horse motor finance subsidiary could reach £2.5 billion.

In its announcement, Lloyds pointed out that ‘while the FCA review is progressing there is significant uncertainty as to the extent of misconduct and customer loss, if any, the nature and extent of any remediation action, if required, and its timing’.

The trading statement went on to say: ‘ The charge includes estimates for operational and legal costs, including litigation costs, together with estimates for potential awards, based on various scenarios using a range of assumptions, including for example, commission models, commission rates, applicable time periods (between 2007 and 2021), response rates and uphold rates.

‘Costs and awards could arise in the event that the FCA concludes there has been misconduct and customer loss that requires remediation, or from adverse litigation decisions.’

Speaking to the BBC's Today programme, Lloyds chief executive Charlie Nunn said: ‘The extent of any misconduct or loss on behalf of customers, if any, remains unclear so we welcome the FCA's announcement a few weeks ago to look in to this to provide clarity for customer and the industry.’

In answer to shareholder questions, Lloyd confirmed that the lender continues to receive a number of court claims and complaints in respect of motor finance commissions. A complaint involving Black Horse lending on car finance to a Mrs Y was one of two rulings where the Financial Ombudsman Service (FOS) found the consumer had been disadvantaged because commission arrangements were not disclosed at the time.

‘Coming a week after the news that Close Brothers has decided not to issue a dividend because of the uncertainty about the outcome of the FCA review, Lloyds’ significant increase in provision for any compensation claims indicates the impact this intervention is having on the lending landscape. The motor finance market needs clarity about the review’s scope and the regulator’s approach’,” noted Edward Peck, CEO of Asset Finance Connect.

‘Lenders will be seeking assurance that regulators thoroughly understand their market. In the FOS case, for example, Black Horse provided evidence showing that the broker made proposals to four different lenders unsuccessfully before introducing Mrs Y to Black Horse. Commission rates are linked to the work involved and the outcome.’