Lender's shares plummet as it warns legal hit could be worse than it thought
Lloyds Banking Group has stated that it will likely need to increase the funds set aside to compensate customers affected by the motor finance scandal, following the Financial Conduct Authority’s (FCA) proposal for a redress scheme, which estimates the total industry cost at around £11 billion.
A major player in the car finance market, Lloyds had previously allotted £1.15 billion to cover redress costs. However, the bank now expects this sum may not be sufficient. The lender’s shares fell by more than 3% after the update.
“Uncertainties remain outstanding on the interpretation and implementation of the proposals but based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which may be material,” Lloyds stated, adding that it continues to review the FCA’s consultation documents.
The FCA’s plan, announced on Tuesday, aims to compensate consumers for motor finance deals made between 2007 and 2024 where commission arrangements and ties between lenders and car dealerships were not properly disclosed. The regulator estimates that 14.2 million agreements could be affected, with an average payout of £700 per deal. The regulator expects about 85% of eligible consumers to seek redress.
Lloyds says it’s likely it will have to set aside an additional provision to compensate customers who were missold car loans https://t.co/mVfBkaOnQs
— Bloomberg (@business) October 9, 2025
Banks including Barclays and the UK arm of Santander have collectively set aside over £2 billion for compensation. However, analysts have highlighted a significant gap between this figure and the FCA’s £11 billion estimate.
According to the FCA, roughly half of the liabilities will be borne by “captive lenders”—subsidiaries of vehicle manufacturers—with the remainder falling to banks. Analysts at Jefferies estimate that Lloyds may ultimately face charges above £2 billion, based on its share of industry commissions.
Earlier this year, Lloyds chief executive Charlie Nunn (pictured right) expressed support for the government’s intervention in the issue, which has left lenders facing the prospect of substantial compensation claims and ongoing regulatory uncertainty.
Close Brothers, another significant lender in the car finance sector, has also indicated that its existing provision of £165 million may not be adequate. The company warned that the cost of the compensation scheme is likely to be “materially” higher, leading to a share price drop of around 9%. Close Brothers stated it is assessing the impact of the FCA’s proposals.
The mis-selling issue centres on commissions paid by lenders to car dealerships, which were sometimes inadequately disclosed. The FCA banned certain commission models in 2021, prompting a surge in consumer complaints. Although a Supreme Court ruling in August largely favoured lenders, the FCA confirmed plans for a redress scheme shortly afterwards.
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