Lloyds Banking Group has increased its provisions for the car finance mis-selling scandal, now expecting to pay out up to £2 billion in compensation. The additional £800 million, announced last week, raises the total set aside by the bank to nearly £2 billion, as millions of customers who were sold car finance with undisclosed broker commissions prepare to receive redress.
This move highlights the ongoing impact of the financial misconduct involving hidden commission payments between car dealers and lenders, a scandal that has now come under intense scrutiny by the Financial Conduct Authority (FCA). Lloyds is one of several major banks now facing substantial costs in what could become one of the UK’s largest financial redress schemes since the Payment Protection Insurance (PPI) debacle.
The Scale of the Car Finance Mis-selling Crisis
The mis-selling of car finance has affected millions of UK drivers who took out loans between 2007 and 2024. According to the Financial Conduct Authority (FCA), around 14 million finance agreements could be eligible for redress. The core issue is that many lenders failed to properly disclose commission payments to brokers, meaning customers were unaware of how much their broker was being paid, often resulting in higher interest rates or worse loan terms.
The FCA’s investigation, which follows a ruling by the Supreme Court in August, concluded that these deals were unfair, with the potential for drivers to be compensated an average of £700 each. This redress is designed to address the overcharging that resulted from these undisclosed commission arrangements. Lenders like Lloyds, which operates the Black Horse finance brand, are at the heart of the issue due to their significant involvement in the market.
Despite the billions expected to be paid in compensation, Lloyds has expressed concern over the methodology being proposed by the FCA. The bank believes that the current approach does not accurately reflect the real losses customers incurred. It has indicated that it will engage with the FCA to argue for a more accurate compensation model, as well as to challenge the legal interpretation that underpins the redress calculations.
A Multi-Billion-Pound Fallout for the Banking Sector
Lloyds is not the only bank facing the financial fallout from the car finance scandal. Close Brothers, a key lender in the market, has already set aside £165 million, but it too has warned that this provision may need to increase. Meanwhile, other banks such as Santander and Barclays are also preparing for significant financial impacts, with Santander setting aside an estimated £350 million for compensation costs.
The size of the compensation scheme, which could eventually reach £11 billion, underscores the scale of the mis-selling problem. The FCA has estimated that 44% of all car finance agreements made since 2007 could be deemed unfair due to inadequate disclosure of commissions. With up to 14 million agreements in question, the financial impact on lenders like Lloyds is considerable.
