Lloyds challenges car loan compensation bill as it warns of £2bn hit

Concerns about the UK financial watchdog’s plans to compensate people mis-sold a car loan have grown, after Lloyds Banking Group warned it was facing a bill of nearly £2 billion over the issue.

The high street banking giant raised criticisms about the Financial Conduct Authority’s (FCA) calculations for how much consumers lost out.

The FCA said payouts are due on around 14 million unfair car finance deals, averaging at about £700 each, within a 360-page consultation document for its proposed redress scheme published last week.

It calculated that the total bill to the motor finance industry could reach around £11 billion under its scheme.

Lloyds said that, having considered the details, an additional £800 million was needed to cover the potential costs of the scheme – bringing its total provision to £1.95 billion.

This incorporates payouts to customers and the operational costs of organising the compensation.

But the bank also told investors that it did not think the FCA’s calculations reflect the actual amount that customers lost out.

Lloyds believes customers could therefore get more than the full commission back under the proposed scheme.

The FCA has proposed that consumers are compensated the average of what it estimates they overpaid, and the commission paid, plus interest.

It believes that 44% of all agreements made between 2007 and 2024 were unfair and therefore qualify for compensation.

This is because customers were likely to have been charged a higher interest rate on their loan as a result of discretionary commission arrangements (DCAs).

The FCA said this was unfair to customers who may not have been properly informed about that arrangement so did not have the opportunity to negotiate or find a better deal.

Lloyds told investors on Monday: “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 group will make representations to the FCA accordingly,” it added.

Since publishing its proposals, motor finance lender Close Brothers also warned that its £165 million existing provision would likely not be enough to cover the costs associated with the redress scheme.

Santander is also understood to be reviewing the consultation, having previously set aside £295 million for the issue.

Meanwhile, carmaker BMW is seeking a meeting with the Treasury to discuss its concerns with the industry-wide redress scheme, according to  reporting in The Times.

Reports said that bosses of the firm have asked to speak with Chancellor Rachel Reeves as it also prepares to foot a big bill.

Russ Mould, investment director for AJ Bell, said Lloyds “gives the impression it is not happy with the proposed compensation methodology, implying this is not a done and dusted situation”.

“It isn’t trying to wriggle out of paying compensation full stop. Instead, it appears to be pushing for a fairer redress system,” he said.

“A rising share price represents two things: one, some clarity on Lloyds’ potential exposure; and two, hope that Lloyds might successfully get the regulator to tweak its proposal in its favour.”

Lloyds shares were rising by about 1.5% on Monday morning.