Lloyds Banking Group has issued a stark warning that the £1.2 billion it has set aside to cover compensation related to the UK motor finance commissions scandal might not be enough. The Financial Conduct Authority (FCA) recently released proposals suggesting that lenders across the sector could be liable for up to £11 billion in compensation and operational costs.
The scandal centers on the mis-selling of motor finance deals, with some 14.2 million agreements made between April 2007 and November 2024 potentially deemed unfair due to undisclosed or improperly disclosed commissions paid to brokers and dealerships. This has triggered one of the largest consumer redress schemes in recent UK financial history.
Lloyds, a major player in the motor finance market, had already earmarked approximately £1.15 billion for potential payouts. However, the FCA’s recent proposals and market estimates indicate that the ultimate compensation costs could significantly exceed this provision, putting pressure on Lloyds to increase its reserves. Following the announcement, Lloyds’ shares dropped around 2%, reflecting investor concerns about the financial impact.
Other lenders, including Close Brothers, have also flagged the need to shore up compensation funds, with Close Brothers’ shares tumbling 9.2% after it disclosed additional provisions may be necessary.
Analysts from Citi and Jefferies project Lloyds may need to boost its compensation provisions to around £1.5 billion, with a worst-case scenario estimate reaching £1.85 billion. Despite this uncertainty, the FCA’s scheme is designed to compensate consumers at an average of approximately £700 per affected motor finance deal.
The timing of these developments means the redress payments will likely begin in early 2026, with insurers, lenders, and captive finance companies all expected to shoulder substantial costs. Consumers are encouraged to submit claims if they believe they were mis-sold motor finance agreements without clear disclosure of commission structures.
As the FCA’s consultation period continues until mid-November, Lloyds and other lenders are assessing the scope and financial impact of the proposals. The scandal serves as a sobering reminder of the ongoing scrutiny faced by UK financial firms and highlights the importance of transparency in consumer credit agreements.
For Lloyds, the motor finance saga remains a significant financial and reputational challenge and one that may require far greater cash reserves than initially anticipated to fully resolve.
