Lloyds Banking Group Sets Aside £1.95 Billion for Motor Finance Compensation

Lloyds Banking Group has set aside approximately £1.95 billion to cover potential compensation linked to historic motor finance commission arrangements. The figure makes Lloyds the most financially exposed UK lender so far in relation to the Financial Conduct Authority’s review of discretionary commission models.

The provision covers agreements primarily written through Black Horse, Lloyds’ motor finance arm, which has been one of the largest providers of car finance in the UK for more than a decade.

The scale of the provision reflects both the size of Lloyds’ historic motor finance book and the growing expectation that a structured redress outcome may follow the FCA’s ongoing review.

Why Lloyds Has Set Aside Nearly £2 Billion

A provision is not an admission of liability. It is an accounting measure that prepares for possible future costs.

Lloyds first announced a motor finance provision in early 2024 and has increased it in stages as regulatory and legal developments unfolded. The total now stands at around £1.95 billion.

The FCA’s investigation centres on discretionary commission arrangements used before 28 January 2021. Under those arrangements, car dealers could adjust the interest rate offered to customers within a set range. A higher interest rate meant higher commission for the dealer.

The FCA banned discretionary commission models in 2021 after finding they created a risk of unfair outcomes.

Lloyds, through Black Horse, funded a substantial share of dealership arranged Personal Contract Purchase and Hire Purchase agreements between April 2007 and January 2021. Given the scale of its lending during that period, its exposure is higher than many competitors.

Scale of the Wider Market

The FCA estimates that around 14 million motor finance agreements were written between April 2007 and January 2021, where commission disclosure may be relevant. That represents roughly 40% to 45% of all motor finance agreements during that timeframe.

Motor finance is one of the largest consumer credit markets in the UK. In recent years, more than 80% of new cars have been purchased using finance.

Across the sector:

• Lloyds Banking Group has set aside approximately £1.95 billion
• Barclays has allocated £325 million
• Santander has set aside £295 million
• Close Brothers has reserved around £300 million
• Bank of Ireland UK has increased its provision to roughly £350 million

Total sector provisions are now expected to exceed £2 billion, with some analyst estimates suggesting overall exposure could reach £8 billion or more depending on the final redress model and participation rates.

Legal Pressure and Court Rulings

In addition to regulatory scrutiny, court decisions have intensified pressure on lenders.

In 2024, the Court of Appeal ruled in cases involving the disclosure of commission in motor finance agreements. The court examined whether failure to disclose commission could create an unfair relationship under the Consumer Credit Act 1974.

While aspects of the legal position remain subject to further clarification, the rulings prompted several banks, including Lloyds, to reassess potential liability.

The legal risk is particularly relevant to lenders with large historical volumes of dealership arranged finance, such as Black Horse.

What the FCA May Require

The FCA is consulting on a possible industry wide redress scheme. Under early consultation estimates, average compensation could be around £700 per agreement, although actual payouts would vary depending on individual financial impact.

If a formal scheme is introduced, lenders may be required to proactively identify and compensate affected customers, rather than waiting for individual complaints.

The FCA previously introduced a temporary pause on complaint response deadlines for certain motor finance complaints while it completes its review. A final regulatory decision is expected in 2026.

What This Means for Black Horse Customers

If you took out a car finance agreement through Black Horse before 2024, your agreement may fall within the review period.

Key issues in complaints include:

• Whether a discretionary commission was applied
• Whether the commission was clearly disclosed
• Whether your interest rate was increased to generate commission
• Whether the relationship could be considered unfair

Not every agreement will qualify for compensation. Each case depends on its specific facts and documentation.

Customers can complain directly to Lloyds or Black Horse at no cost. If dissatisfied with the final response, complaints can be referred to the Financial Ombudsman Service within six months.

Impact on Lloyds Financial Results

The £1.95 billion provision affects reported profits and capital planning, but Lloyds has stated that it remains well capitalised.

Large conduct provisions are not new to the UK banking sector. However, the size of Lloyds’ allocation highlights the significance of motor finance within its lending portfolio.

Industry analysts are closely monitoring whether further increases may be required once the FCA finalises its approach.

Mis-Sold Expert Support

If you had a Black Horse or Lloyds motor finance agreement before 2024 and are unsure how your interest rate was set, you can request your agreement details and commission information directly from the lender. Mis-Sold Expert will check your agreement and help you understand if you are eligible for compensation.

You can claim without using a claims management company; you can go to your finance provider and then to FOS, for free. Additionally, the FCA is introducing a free consumer redress scheme.