Motor Finance Provisions Exceed £2bn as Bank Profits Impacted

Major UK banks have reported significant financial impacts after setting aside billions of pounds to cover potential compensation linked to historic motor finance commission arrangements.

The Financial Conduct Authority’s ongoing review into discretionary commission models has prompted lenders to increase provisions significantly over the past two years. Total sector provisions now exceed £2 billion, with some analyst estimates suggesting overall exposure could reach up to £8 billion or more, depending on how a final redress scheme is structured.

For investors and regulators, the focus is on financial resilience. For customers, the question is whether historic agreements were fairly structured.

Lloyds Banking Group Most Exposed

Lloyds Banking Group, which owns Black Horse, has set aside approximately £1.95 billion for potential motor finance compensation.

The provision has been increased in stages since early 2024, reflecting developments in both regulatory consultation and court rulings. Lloyds’ large exposure reflects the scale of its historic motor finance lending, as it has been one of the UK’s largest providers of dealership-arranged PCP and HP agreements.

The £1.95 billion allocation has reduced reported statutory profit in affected reporting periods. However, Lloyds has stated it remains well capitalised and continues to meet regulatory capital requirements.

Barclays, Santander and Specialist Lenders

Other major lenders have also adjusted financial forecasts:

Barclays has increased its motor finance provision to £325 million
Santander UK has allocated approximately £295 million
Close Brothers has set aside around £300 million
Bank of Ireland UK has reserved roughly £350 million

These figures are accounting provisions rather than confirmed liabilities. They reflect uncertainty about how many agreements may qualify for compensation and how the FCA will calculate redress.

The cumulative total across major institutions now exceeds £2 billion, making motor finance one of the most significant ongoing conduct issues in UK retail banking.

Share Price Volatility After Court Rulings

In 2024, the Court of Appeal issued judgments concerning commission disclosure in motor finance agreements. The court examined whether failing to disclose dealer commission could create an unfair relationship under the Consumer Credit Act 1974.

Following the ruling, shares in some specialist lenders experienced noticeable volatility. Close Brothers, due to its concentrated exposure to motor finance, saw particular investor scrutiny.

High street banks with diversified income streams experienced less pronounced share price movement, although analysts revised earnings forecasts to reflect increased conduct risk.

Market reaction reflects uncertainty rather than confirmed liability. Investors are assessing how the final FCA decision may affect capital planning and dividend forecasts.

FCA Review Covers 14 Million Agreements

The FCA estimates that around 14 million motor finance agreements written between April 2007 and 28 January 2021 may fall within the review period. This represents approximately 40% to 45% of motor finance agreements during that timeframe.

Motor finance remains a dominant method of vehicle purchase in the UK, with more than 80 percent of new cars typically bought using finance.

The FCA banned discretionary commission arrangements from 28 January 2021 after identifying a risk that dealer incentives could lead to higher interest rates for customers.

The regulator is now consulting on whether to introduce a formal industry wide redress scheme. A final decision is expected in 2026.

Analyst Projections and Capital Strength

Independent analysts have suggested that total redress costs across the sector could reach £8 billion or more under high participation scenarios.

However, several banks have emphasised that they remain strongly capitalised and able to absorb potential liabilities within existing capital buffers.

UK banks operate under strict regulatory capital requirements overseen by the Prudential Regulation Authority. Conduct provisions reduce profits but do not automatically threaten solvency.

For comparison, the Payment Protection Insurance redress programme ultimately cost the industry more than £38 billion over many years. Motor finance exposure is currently projected at a lower level, although final figures depend on the FCA’s methodology.

What This Means for Consumers

Provision increases affect bank financial results but do not determine whether an individual agreement qualifies for compensation.

If you took out a Personal Contract Purchase or Hire Purchase agreement before 28 January 2021, your agreement may fall within the FCA review period.

Key issues include:

Whether discretionary commission was applied
Whether your interest rate was increased to generate commission
Whether this was clearly explained at the time
Whether the relationship could be considered unfair

Not every agreement will qualify for redress. Each case depends on its specific facts.

You do not need to use a claims management company to complain. You can contact your lender directly free of charge.

If you are unsure whether commission affected your agreement, you can request your finance documents from your lender at no cost.

You can also ask Mis-Sold Expert to review your agreement details and explain how commission may have been applied. This does not guarantee compensation. You remain free to complain to your lender yourself or seek independent advice.

If you receive a final response and are not satisfied, you can refer your complaint to the Financial Ombudsman Service within six months.

How 2026 will look for lenders

The final financial impact on banks will depend on:

The FCA’s confirmed redress framework
Participation levels among affected customers
How financial detriment is calculated
Any further legal clarification

Until the FCA publishes final rules, lenders are likely to continue refining risk estimates and adjusting provisions where necessary.

Motor finance remains one of the most significant conduct reviews currently facing the UK banking sector.

If you think you may have been mis-sold on any past car finance agreements. Check your agreements today with Mis-Sold Expert. If you require more information on car finance claims and mis-selling, contact us, and a member of our specialist team will answer any questions you may have.

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.