Lloyds adds £800m to car finance scandal fund as UK redress costs soar

Lloyds Banking Group has set aside an additional £800 million to cover compensation claims linked to the UK’s motor finance mis-selling scandal, taking its total provision to £1.95 billion.

The lender, one of the largest players in the car finance market, had previously allocated £1.15 billion for payouts.

The bank said the increase reflects new estimates from the Financial Conduct Authority (FCA), which last week outlined a proposed £11 billion redress scheme for consumers who were overcharged under discretionary commission arrangements (DCAs) – deals that allowed car dealers to set loan interest rates to boost their own commissions.

FCA widens scope for compensation claims

According to the FCA’s consultation paper, historical cases dating back to 2007 may now qualify for redress, making this one of the costliest consumer compensation exercises since the payment protection insurance (PPI) scandal.

Lloyds said it would challenge aspects of the regulator’s methodology, arguing that the FCA’s calculations were “less closely linked to actual customer loss than previously anticipated.” Despite the higher provision, shares in Lloyds rose around 1 per cent on Monday, October 13, reflecting investor relief that the additional charge was smaller than feared.

Analysts at RBC said lenders would now seek to persuade the regulator to adjust the scheme to better align with the Supreme Court’s ruling on compensation. The FCA estimates that banks will bear 51 per cent of the total cost, with the remainder split between captive lenders – such as car manufacturers’ finance arms – and independent providers.

Other lenders, including Santander UK, Barclays, Close Brothers, and BMW Financial Services, have also set aside funds, while the Financing and Leasing Association has warned the multi-billion-pound bill could disrupt the car finance market, potentially leading to fewer or more expensive loans.

The dispute, centred on millions of car loans issued before DCAs were banned in 2021, has been described as one of the largest financial scandals since PPI, affecting an estimated 14 million agreements with average payouts of around £700 per customer.

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