Lloyds sticks to £2bn provision for motor finance compensation

Lloyds Banking Group is sticking to a £1.95 billion provision to compensate customers mis-sold a car finance loan, having reviewed changes to the financial watchdog’s compensation scheme.

The banking giant said it “does not currently believe any change to the provision for this issue is required” after assessing the Financial Conduct Authority’s (FCA) final rules, which were published on Monday.

Lloyds has made the biggest provision for the saga of any UK lender, but across the industry, including firms Santander, BMW and Mercedes-Benz, billions of pounds have been set aside to cover compensation costs.

This is despite the FCA making a number of changes to the scheme, compared to its original proposals set out last year.

This included tightening the rules for people to claim so that 12.1 million car finance deals are estimated to be eligible – some two million less than before.

The final scheme has resulted in the overall cost to the industry being cut by about £2 billion, to an estimated £9.1 billion.

But the tweaks have also pushed up the average expected payout from £700 to £830, meaning that people could get more from their claims.

But Lloyds added that there “remain a number of uncertainties” including the rate of customer responses, operational costs and any legal proceedings.

Lloyds may be facing legal action, with law firm Courmacs Legal expected to file a claim on behalf of around 30,000 car loan customers, seeking some £66 million in damages.

It would represent a major legal challenge to the lender’s Black Horse motor finance brand, outside of the FCA’s scheme.

The regulator has repeatedly said consumers do not need to use lawyers or claims management firms to complain, warning that they risk losing more than 30% of their compensation as a result of fees.

It has set up the free scheme to compensate people who were treated unfairly when they took out a motor finance agreement between April 2007 and November 2024.

Most of the deals covered involve so-called discretionary commission arrangements (DCAs), which were banned in 2021.

This refers to arrangements whereby brokers, including car dealers, were able to increase interest rates on car loans so they could get more commission.

The FCA said this led to unfairness for customers who were not properly informed about the arrangement and therefore did not have the opportunity to negotiate or find themselves a better deal.