Lloyds Banking Group is preparing for a major financial hit, setting aside an extra £800 million to cover compensation claims linked to car finance deals—bringing its total provision for redress
to almost £2 billion.
The bank said it now expects more customers to be eligible for compensation than previously thought. The claims relate to millions of drivers who took out car finance agreements between 2007 and 2024 that included hidden commission payments.
The Financial Conduct Authority (FCA) recently released details of its proposed compensation scheme. It estimates that around 14 million unfair deals could be eligible for payouts, with an average of £700 per claim. Across the industry, this could add up to £8.2 billion in compensation.
The FCA’s proposals target three main issues: undisclosed commission arrangements between lenders and dealers, unfair contract terms, and misleading information given to car buyers.
Lloyds said in a statement: “Based on the FCA proposals in their current form, the potential impact is at the adverse end of the range of previous expected outcomes.” It added that its "best estimate" for the total cost of redress is £1.95 billion.
Unlike the earlier PPI scandal, the proposed car finance scheme would be free for consumers to access, though the interest paid on compensation is expected to be much lower. For context, the PPI scandal eventually cost Lloyds £22 billion.
The FCA believes that 44% of all motor finance agreements since 2007 could be eligible for payouts, although a Supreme Court ruling in August narrowed the scope of potential cases.
The regulator advises anyone wanting to make a complaint to contact their lender or broker, providing guidance on the process. However, the Finance and Leasing Association, which represents the lending industry, has argued that the FCA may be "overcompensating" borrowers.
Other lenders are also facing potential costs. Close Brothers, another company heavily involved in motor finance, said it would likely need to increase its current provision of £165 million, though it noted that uncertainty remains while the FCA finalizes the scheme.
Consumer groups are urging lenders to cooperate with the FCA to avoid further delays, so drivers can receive compensation without a prolonged legal battle. Photo by Lloyds Bank at Carfax by Fly, Wikimedia commons.