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Banking giant Lloyds has set aside £450m to cover the potential costs of an investigation into car financing transactions by the UK financial regulator.
An investigation into whether people are paying too much for cars was launched last month by the Financial Conduct Authority (FCA).
Brokers who arranged car loans earned commissions based on the interest rates they set for their customers.
Lloyds disclosed the provision when it announced a significant increase in annual profits.
The bank said its pre-tax profits soared to £7.5bn last year, beating expectations and increasing by 57% on the previous year.
Last month, the FCA announced it would investigate whether people who believe their car loan charges are too high are liable for compensation.
Under so-called discretionary fee arrangements, some lenders allowed auto dealers to adjust interest rates on loans to improve the fees they received. In other words, the higher the interest rate, the higher the fees.
As a result, these deals created an incentive for brokers to increase the amount people charged on their car loans.
The FCA will ban these arrangements in 2021, saying it would save drivers overall £165m a year.
The amount Lloyd’s ultimately pays in compensation may be higher or lower than the amount initially set aside.
However, Lloyds owns Blackhorse, one of Britain’s biggest car financiers, and is seen as the most at risk of debt among the big banks.
Some analysts claim that the total damages could reach billions of dollars.
Lloyds chief executive Charlie Nunn told the BBC’s Today programme: “The extent of any fraud or loss, if any, on behalf of our customers remains unclear and we would like to provide clarity. “We welcome the FCA’s announcement a few weeks ago that it will investigate this.” For our customers and our industry. ”
Matt Blitzman, equity analyst at Hargreaves Lansdown, said the £450m the bank had set aside was “less than some feared, but it’s hard to imagine how Lloyds could achieve this figure.” There are doubts as to whether we have achieved this.”
“Lloyd’s has honestly stated that the outcome of the review is largely unknown,” he added. “What we do know is that Lloyds is one of the banks that is more at risk if the FCA deems there has been fraud or customer loss.”
