LONDON, October 13, 2025: Lloyds Banking Group has increased its provision for car finance compensation by £800 million, bringing its total allocation for redress to £1.95 billion, as the UK’s financial regulator moves forward with a major remediation scheme targeting historical misconduct in motor finance agreements. The revised estimate, announced by the bank on Monday, follows updated guidance from the Financial Conduct Authority (FCA), which is consulting on a compensation framework addressing the widespread use of discretionary commission arrangements between car dealerships and lenders.
These arrangements, in place between 2007 and 2021, often allowed dealers to increase a customer’s interest rate in return for higher commission, without the buyer’s knowledge. The FCA has said that approximately 14 million car finance deals may be affected, with around 44 percent of all agreements during the period under review potentially eligible for compensation. Average payouts are expected to be around £700 per case, which would equate to a total industry compensation bill of roughly £8.2 billion. The overall cost, including administrative expenses, is forecast to reach £11 billion.
Lloyds, which operates the UK’s largest motor finance business through its Black Horse subsidiary, said the additional provision reflects the increased likelihood of a greater number of historical cases qualifying for redress under the proposed rules. The bank described the FCA’s proposal as being at the “adverse end” of its previously estimated range of outcomes. In its statement, Lloyds acknowledged the complexity and scale of the issue, noting that while it does not believe the FCA’s methodology fully reflects actual customer detriment, it is cooperating with the regulator’s process.
Additional £800 million added to Lloyds’ compensation reserve
The group reported that the current £1.95 billion provision represents its best estimate based on the details of the scheme released so far. The FCA’s redress scheme is currently subject to consultation, which will determine the final structure and scope of the payouts. Under the draft proposal, compensation would be calculated based on the average commission paid to dealers in eligible cases, plus interest. The scheme will be free to access for consumers, with a lower interest rate applied than that used in the Payment Protection Insurance (PPI) redress programme, which previously cost Lloyds £22 billion.
Close Brothers, another UK-based lender with significant exposure to car finance, said it also expects to increase its provision beyond the current £165 million, following its initial assessment of the FCA’s proposals. The company said uncertainty remains around the final amount, pending the outcome of the consultation. Shares in several affected lenders have been under pressure since the FCA announced the redress plans earlier this month. Investors have responded to concerns about the scale of potential liabilities and the time required to process compensation claims across millions of contracts.
Lenders and regulators brace for large-scale compensation claims
The Finance and Leasing Association, which represents the motor finance industry, has expressed concern about the proposed methodology, warning that it may lead to overcompensation in some cases. However, the FCA maintains that the scheme is designed to return affected consumers to the financial position they would have been in had fair arrangements been in place.
The redress initiative follows a ruling earlier this year by the Financial Ombudsman Service, which found that some customers were not properly informed about how their interest rates were determined. A subsequent judgment by the UK Supreme Court in August clarified the legal boundaries of such claims but did not prevent the FCA from pressing ahead with a formal compensation framework. The FCA is expected to complete its consultation and finalize the scheme in early 2026. – By EuroWire News Desk.