When I started writing for The Motley Fool in January 2003, I began a course of action that cost British lenders £53.5bn in compensation. Indeed, my actions hurt the Lloyds Banking Group (LSE: LLOY) share price for years.
My ‘dark side’
From 1991 to 2002, I worked in the PPI (payment protection insurance) industry. After leaving PPI behind, I spent from 2003 until 2019 waging war on this massive financial swindle. Through hundreds of articles, interviews, and broadcasts, I blew up this market by using my insider knowledge to expose its huge failings.
My campaign earned me notoriety as ‘the guy who killed PPI’ and ‘the world’s biggest whistle-blower’. My friend Martin Lewis of MoneySavingExpert.com fame was a powerful ally in this battle. By the end of this scandal, Lloyds and subsidiaries had paid out nearly £22bn in compensation. Ouch.
Yet another financial scandal
Now Lloyds and other British lenders face another lengthy compensation conflict regarding mis-sold motor-finance agreements.
Before 2021, providers of car finance allowed dealers to add secret ‘discretionary commission arrangements’ (DCAs) — paid via higher interest rates — to lending agreements. This practice was banned in 2021 and earlier this month, the UK Supreme Court delivered judgements on three key legal cases.
The Supreme Court’s rulings will prevent many mis-selling claims from succeeding. Before this, estimates of total DCA compensation peaked at £44bn. After this judgement, the total bill will be much lower. And for claims to succeed, commission arrangements must have been excessive — or the relationship between dealer and car buyer clearly unfair.
Lloyds faces large losses
Lloyds is a major player in motor finance through subsidiary Black Horse. Hence, it will be keeping close watch on this situation.
However, the UK government is worried about a new wave of compensation claims harming bank lending to businesses and consumers. Earlier, HM Treasury tried to intervene in this dispute, but judges rejected its involvement.
Now the House of Lords has waded into this dispute, after the Financial Conduct Authority (FCA) set out proposals for a consultation on a redress scheme. Peers on the House of Lords’ Financial Services Regulation Committee have expressed concerns over the scheme, warning of ‘market uncertainty’ for lenders and demanding ‘further insight’ from the FCA.
Peers are also concerned that claims dating back as far as 2007 might be reviewed, questioning the legal basis for this timescale. Despite this, the FCA expects total compensation of between £9bn and £18bn.
Might the Chancellor intervene?
Given the importance of credit growth to a healthy economy, Rachel Reeves might wade into this dispute. I could imagine the Chancellor stepping in if this problem matched the PPI scandal for size, but not with under £18bn at stake.
Lloyds has already set aside £1.2bn for DCA compensation — a figure that may rise. Then again, when the Supreme Court delivered its verdicts on 1 August, Lloyds share price leapt by 9%. Perhaps buyers are pricing in minimal stress for Lloyds from DCA payouts? To me, it looks like Reeves won’t need to act, so I expect she won’t.
Lastly, despite rising 45.1% over one year and 184.8% over five, Lloyds stock still offers a dividend yield above 4% a year, versus 3.3% from the FTSE 100. For this reason, my family portfolio will keep hold of our shares!
