Lloyds takes £800m extra hit in car finance mis-selling scandal

Lloyds Banking Group said it will take an additional £800 million charge to cover the cost of compensating customers affected by the UK’s motor finance mis-selling scandal, lifting its total provision to £1.95 billion.

The move follows last week’s proposal by the Financial Conduct Authority (FCA) for an industry-wide redress scheme that could cost UK banks between £8.2 billion and £9.7 billion. The FCA’s review found that millions of car finance customers were overcharged because of discretionary commission arrangements (DCAs), under which car dealers could raise loan interest rates to earn higher commissions, a practice banned in 2021.

Lloyds, Britain’s largest motor finance provider through its Black Horse business, said the FCA’s methodology for calculating redress was “less closely linked to actual customer loss than previously anticipated,” suggesting payouts could be higher than its earlier models assumed.

The FTSE 100 lender warned that more historic cases, some dating back to 2007, are now likely to qualify for compensation.

“The group remains committed to ensuring customers receive appropriate redress where they suffered loss,” Lloyds said in a statement, “however, the group does not believe that the proposed redress methodology outlined in the consultation document reflects the actual loss to the customer.”

“Nor does it meet the objective of ensuring that consumers are compensated proportionately and reasonably where harm has been demonstrated.”

The FCA estimates that around 14 million car finance agreements could be eligible for redress, with average payouts of about £700 each. That is lower than the £950 previously expected, but the regulator’s broader eligibility criteria have expanded the pool of affected cases.

Despite the provision increase, Lloyds’ shares rose 1.3% in early trading on Monday, suggesting investors viewed the announcement as providing greater clarity over potential liabilities.

The scandal has prompted several lenders and car manufacturers to re-evaluate their exposure. Close Brothers recently warned it would also increase provisions, while South Africa’s FirstRand criticised the FCA’s scheme as exceeding “reasonable” expectations. BMW, facing potential losses of around £200 million, is reportedly seeking talks with the Treasury to discuss the plan.

The FCA’s consultation follows a Supreme Court ruling earlier this year that overturned parts of a Court of Appeal decision, reducing potential industry-wide liabilities that could have reached £44 billion.

Still, Lloyds’ additional charge underscores the scale of the scandal’s lingering impact on Britain’s banking sector.