Lloyds Banking Group has found itself at the heart of a storm that could reshape the UK’s car finance industry. On October 13, 2025, the high street lender announced it would set aside an additional £800 million to cover the anticipated costs of a sprawling car finance mis-selling scandal, raising its total provision to a staggering £1.95 billion. This move follows a series of revelations and regulatory proposals that have left both consumers and the financial sector bracing for a reckoning unlike any seen since the notorious payment protection insurance (PPI) debacle.
The Financial Conduct Authority (FCA), the UK’s chief financial watchdog, published a comprehensive 360-page consultation document just a week prior, outlining a proposed compensation scheme that could see payouts on up to 14.2 million car finance agreements. The FCA’s calculations estimate the average eligible customer could receive around £700, a figure that, if applied across all qualifying agreements, could see the industry footing a bill approaching £11 billion. According to Sky News, the FCA’s proposals were prompted by its findings that many lenders had failed to disclose commissions paid to brokers, a practice that often led to customers paying more than necessary between April 2007 and November 2024.
Lloyds’ announcement came with a clear message: the bank is preparing for higher customer redress costs, but it has deep reservations about the methodology underpinning the FCA’s scheme. In a statement to investors, Lloyds 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.”
At the core of the dispute is how compensation should be calculated. The FCA proposes that consumers be compensated for the average of what it estimates they overpaid, plus the commission paid and interest. It believes that 44% of all car finance agreements made between 2007 and 2024 were unfair—largely due to so-called discretionary commission arrangements (DCAs) that allowed brokers to hike interest rates for their own benefit without properly informing customers. This, the FCA says, deprived buyers of the chance to negotiate or seek better deals elsewhere.
Lloyds, however, argues that the FCA’s approach could result in customers receiving more than just the full commission back. The bank contends that the proposed methodology “does not align with the legal clarity provided by the recent Supreme Court judgment” on unfairness, delivered in August 2025. That ruling, according to The Times, established that unfairness should be assessed on a case-by-case basis, considering a range of factors rather than applying a blanket standard. Lloyds also objects to the FCA’s 44% estimate of unfair agreements, calling it “implausibly high” compared to the 35% tipping point referenced in the Supreme Court decision.
The FCA’s scheme is not just about handing out cheques. It also comes with significant operational costs—an estimated £2.8 billion to administer the program, according to the regulator. Lloyds’ own provision covers both the expected payouts to customers and the costs of organizing compensation. The bank’s exposure is considerable; it provides car finance through its Black Horse business and, as noted by analysts at Jefferies, its share of car finance loans between 2007 and 2024 is about 14%. However, Lloyds may have accounted for more than 20% of industry-wide commissions, highlighting its central role in the unfolding saga.
The scandal itself centers on the opaque world of commissions paid by lenders to car dealers for arranging finance. These commissions were frequently not disclosed to consumers—a practice that, in the eyes of regulators, violated both laws and industry regulations. As a result, millions of motorists who bought cars on finance during the affected period may now be eligible for redress. The FCA has advised anyone who suspects they were mis-sold to contact their lender or broker to begin the complaints process.
Lloyds is not alone in facing a mounting bill. Close Brothers, another major lender with a £165 million provision for the scandal, has already warned that it will likely need to increase its set-aside after reviewing the FCA’s proposals. Santander UK, too, is reviewing its position, having previously allocated £295 million for potential compensation. The Finance and Leasing Association, which represents car loan providers, has voiced strong concerns over the FCA’s estimate that 44% of agreements were unfair, calling the figure “implausibly high.”
Consumer campaigners, meanwhile, are urging lenders not to drag their feet or challenge the FCA’s plans, warning that further delays will only prolong the agony for drivers seeking redress. As BBC News reported, the payouts under the proposed scheme would be free for consumers to access, though the interest paid on redress would be lower than that seen in the PPI scandal—a scandal that ultimately cost Lloyds a jaw-dropping £22 billion.
The Treasury and key industry players are watching developments closely. Earlier fears that a Supreme Court ruling could expose the sector to as much as £44 billion in compensation prompted the government to consider legislative intervention, though this proved unnecessary when the August judgment largely favored lenders. Still, the current situation is far from settled. Executives at BMW have reportedly sought talks with the chancellor over the implications of the redress scheme, and investment experts like Russ Mould of AJ Bell have noted that Lloyds “gives the impression it is not happy with the proposed compensation methodology, implying this is not a done and dusted situation.”
For now, Lloyds’ share price has shown some resilience, rising more than 0.5% after the latest announcement, though it had dipped the previous week on news of the increased provision. The bank’s actions, and its vocal criticisms of the FCA’s approach, suggest that negotiations—and perhaps further controversy—lie ahead. With the FCA’s consultation ongoing and industry lobbyists pushing back against what they see as overcompensation, the final shape of the redress scheme remains uncertain.
What’s clear is that the UK’s car finance sector is undergoing a period of unprecedented scrutiny and change. The outcome of this dispute will not only determine the financial fate of millions of motorists but could also set new standards for transparency and fairness in lending for years to come.
