On October 13, 2025, Lloyds Banking Group Plc, one of the United Kingdom’s financial heavyweights, announced it would set aside an additional £800 million ($1.07 billion) to compensate customers who were missold car loans. This move, revealed in a series of filings and statements, brings Lloyds’ total provision for the motor finance scandal to nearly £2 billion—and the shockwaves are being felt across the entire UK banking sector.
The decision comes in response to an industry-wide redress program initiated by the UK’s Financial Conduct Authority (FCA), which, after months of investigation, published a sweeping 360-page consultation paper outlining the scale of the problem and the expected compensation. According to Investing.com, Lloyds had already established a provision of £1.15 billion for this issue. With the new allocation, the bank’s total provision now stands at £1.95 billion, covering both customer compensation and operational costs.
Why the sudden increase? Lloyds says it expects a higher number of historical cases—some dating as far back as 2007—will be eligible for redress than previously thought. The FCA’s plan, detailed just last week, indicated payouts for around 14 million unfair deals, with compensation averaging £700 each. Most of these cases involve what are known as discretionary commission arrangements (DCAs). Under these arrangements, brokers and car dealers were able to hike up interest rates on car loans to earn themselves higher commissions—often without customers’ knowledge or consent. The FCA has called this practice unfair, noting that many consumers weren’t properly informed and therefore had no opportunity to negotiate or seek better terms.
But Lloyds isn’t taking the FCA’s methodology lying down. In a statement to investors, 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. Nor does it meet the objective of ensuring that consumers are compensated proportionately and reasonably where harm has been demonstrated." The bank argues that, under the proposed scheme, some customers could end up receiving more than 100% of the commission they paid back—an outcome Lloyds calls disproportionate. "The group will make representations to the FCA accordingly," Lloyds added.
It’s not just Lloyds feeling the heat. The FCA estimates that the total cost to the UK banking sector could reach £11 billion, and possibly rise to £12.4 billion if every eligible victim comes forward and secures a payout. According to The Guardian, banks are expected to shoulder 51% of the compensation bill, with so-called captive lenders (finance arms of car manufacturers) taking on 47%, and independent lenders about 2%. Other major lenders are already bracing for impact: Hyundai Capital UK has set aside £34.5 million, Honda Finance Europe has ringfenced £62.2 million, and BMW’s financial arm has earmarked £200 million. Executives at BMW are reportedly seeking talks with the UK Treasury to discuss the scheme and its potential implications for the industry.
The scale of the car finance scandal is staggering. The FCA’s figures suggest it could rival, or even surpass, the notorious payment protection insurance (PPI) mis-selling debacle, which saw 34 million consumers receive an average of about £1,000 each in compensation. The sector, still reeling from that episode, now faces another multibillion-pound reckoning. The Financing and Leasing Association, which represents car lenders, has warned that the bill could disrupt the car finance market, leading some providers to offer fewer or more expensive loans—or, in the worst-case scenario, to go bust.
Lloyds, through its Black Horse division, is the UK’s leading car finance provider. The bank’s exposure to the scandal is significant, and its leadership has not shied away from acknowledging the potential consequences. Last year, Lloyds chief executive Charlie Nunn remarked that the case was feeding into the UK’s "investability problem," a sentiment echoed by analysts and market watchers. On the day of the announcement, Lloyds shares actually rose by 1%, a sign that investors may have already priced in much of the bad news—or perhaps see the bank’s proactive approach as a sign of prudence.
Financially, Lloyds remains a major player. With a market capitalization of £65.32 billion, it operates through three primary segments: retail banking (which includes mortgages, credit cards, and current accounts), commercial banking (serving large companies and financial institutions), and insurance and wealth management. Mortgages make up a whopping 66% of its loan portfolio. Yet, despite a 9.1% revenue growth over the past three years and a robust net margin of 23.7%, the bank’s earnings growth has declined by 10% over the past year—a sign that the headwinds are real.
Lloyds’ balance sheet shows a debt-to-equity ratio of 1.83, indicating a relatively high level of leverage. This, coupled with a poor financial strength rating and a low Piotroski F-Score of 3, has raised eyebrows among analysts. Valuation metrics suggest the bank may be overvalued, with a price-to-earnings ratio of 12.56 (near its three-year high), a price-to-sales ratio of 2.65, and a price-to-book ratio of 1.06. Technical indicators, such as an RSI of 44.64, suggest the stock is neither overbought nor oversold, but caution remains the watchword.
The risks for Lloyds are not insignificant. Beyond the regulatory and legal uncertainties, the bank faces sector-specific challenges—chief among them, the fallout from the car finance mis-selling scandal. The FCA’s redress scheme is still in the consultation phase, and Lloyds has made it clear it will challenge aspects of the proposed methodology. The ultimate outcome may "evolve in response to representations made by various parties as well as further legal proceedings and complaints or any other broader implications of the supreme court judgment," the bank stated.
Industry insiders are watching closely. The Times reported that carmaker BMW is seeking a meeting with the Treasury to discuss its concerns, and the Financing and Leasing Association continues to warn of broader market disruptions. As the FCA’s consultation process unfolds, banks, carmakers, and regulators will have to navigate a complex web of competing interests, legal arguments, and, above all, the need to restore trust with millions of UK consumers.
For now, Lloyds’ nearly £2 billion provision stands as the bank’s "best estimate" of the potential financial impact from the motor finance issue. Whether it will be enough remains to be seen, but one thing is clear: the UK’s car finance scandal is far from over, and its ramifications will be felt for years to come.
