Lloyds Sets Aside £1.95bn for Car Finance Scandal

Lloyds Banking Group has added another £800 million to its compensation fund for the car finance mis-selling scandal, taking its total provision to a massive £1.95 billion. The move follows a proposed redress scheme by the Financial Conduct Authority (FCA), which could see payouts across around 14 million car finance agreements made between 2007 and 2024.

The scandal centres around hidden commission payments between car dealers and lenders, which may have left millions of customers overpaying for their vehicles — often without knowing it. The FCA believes nearly half of all car finance deals over the last 17 years could qualify for compensation, with the average payout estimated at £700.

Lloyds, one of the biggest lenders in the motor finance market, now says it expects more customers to be eligible than they initially thought. However, it’s far from happy with how the regulator has calculated the potential losses.

In a statement, the bank said: "The Group remains committed to ensuring customers receive appropriate redress where they suffered loss, however the Group does not believe that the proposed redress methodology outlined in the consultation document reflects the actual loss to the customer." It went on to say the scheme doesn’t align with recent legal clarity from the Supreme Court, where unfairness in cases like this was judged based on multiple, specific factors. Lloyds intends to challenge the FCA’s redress model during the consultation process.

The FCA, meanwhile, estimates that payouts could total £8.2 billion across the industry — though some analysts say that number could climb even higher, with the total cost potentially hitting £11 billion. Consumer campaigners are urging lenders to accept the plans to avoid more delays.

Despite its concerns, Lloyds isn’t the only bank under pressure. Close Brothers, another major lender in the motor finance space, has also warned it will likely need to increase its current £165 million provision after reviewing the FCA’s proposal. Motor finance accounts for roughly a quarter of its loan book.

Analyst Benjamin Toms from RBC noted that the FCA expects banks to shoulder more than half of the total redress burden, so fears of an even bigger hit had been brewing. “There is some relief today that ‘material’ top-up didn’t equate to a much larger number,” he said.

This scandal is shaping up to be one of the most expensive consumer compensation efforts since the PPI fallout — which ended up costing Lloyds alone £22 billion. While this one may not reach those levels, it's still a huge financial and reputational blow.

For now, the FCA’s scheme is still under consultation, and both sides are preparing for a fight over the final redress rules. But for drivers who unknowingly paid too much for their cars, some long-awaited compensation could be on the way — if the details can be ironed out.