Lloyds and Close Brothers Warn of Surging Costs from Motor Finance Scandal

The ongoing fallout from the UK motor finance scandal is placing severe financial strain on Lloyds Banking Group and Close Brothers, with both lenders announcing that compensation costs will materially exceed their previous estimates. Lloyds, historically a significant operator in the British car loans sector, had already set aside £1.15 billion for customer redress. Now, analysts believe this figure could rise by an additional £850 million, sending Lloyds shares down 33 per cent on the day to close at 835 pence.

Close Brothers echoed Lloyds’ concerns, stating that their own compensation provisions—currently standing at £165 million—are also likely to be insufficient. The company’s shares fell sharply by nearly 13 per cent, closing at 457 pence. The scale of the scandal, triggered by mis-sold car finance agreements and undisclosed commissions paid to car dealers, has become one of the most expensive consumer scandals in British financial history.

The Financial Conduct Authority recently estimated industry-wide compensation relating to mis-sold car loans could reach an astonishing £11 billion, a figure that, while lower than earlier worst-case predictions, reveals a substantial shortfall. To date, banks and lenders have provisioned just around £2 billion, indicating that further significant allocations may yet be required. About half of the proposed liabilities are expected to fall on so-called captive lenders—finance arms owned by car manufacturers.

The FCA’s scheme targets motor finance agreements completed between April 2007 and November of last year. The regulator believes 44 per cent of those agreements—around 14.2 million deals—would be classed as unfair. As a result, affected consumers stand to receive, on average, £700 per qualifying car finance arrangement, with the regulator anticipating an 85 per cent claims take-up rate.

A recent Supreme Court ruling provided some relief to lenders, steering the legal interpretation in their favour and avoiding the gravest potential losses. However, the FCA quickly confirmed its intention to launch a redress scheme, keeping the pressure on the industry. Lloyds, in reviewing the FCA’s consultation documents, stated that further material provisions now seem likely given the proposed framework. Close Brothers is also actively analysing the impact on its balance sheet.

Industry analysts have highlighted the persistent gap between regulator estimates and what banks have set aside, indicating an urgent need for increased transparency and risk management. Some lenders have publicly criticised the scale of the planned redress, questioning the proportionality of the scheme. Even so, the FCA remains confident in the legal and regulatory basis of the compensation programme and has prepared for potential industry legal challenges.