Lloyds Bank Battles FCA Over Eleven Billion Car Finance Scheme As Profits Take Hit

Lloyds Bank has stated it will contest the Financial Conduct Authority’s (FCA) expansive plans for an £11bn car finance compensation scheme, after the mounting cost of the scandal significantly hit its quarterly profits. William Chalmers, Lloyds’ chief financial officer, labelled the FCA’s proposal to pay millions of drivers £700 each as “disproportionate”, warning that the scheme is too broad and not sufficiently tied to actual harm suffered by customers.

Earlier this month, Lloyds set aside an additional £800m to cover prospective costs from the FCA’s redress initiative, increasing its total provision to £2bn. The impact of these extra charges was reflected in a 36 percent decline in pre-tax profits for the third quarter, falling to £1.17bn. Chalmers argued the FCA’s approach, which potentially covers 44 percent of all car finance agreements made between 2007 and 2024, is excessive and exceeds what could justly be defined as unfairness under existing rules.

The compensation scheme was put forward by the regulator after revelations that car buyers were not made aware of sizable hidden commissions paid to dealers, thereby breaching FCA rules. Some 14.2 million drivers are believed to be eligible for payouts, resulting in a bill that could reach £11bn for the industry at large. The Supreme Court ruled earlier in the year that certain agreements where sellers received significant commissions should be deemed extreme, providing the legal impetus for regulatory action. However, Lloyds maintains that the FCA’s intended scope surpasses that which was laid out by the Court.

Lloyds has confirmed it will actively participate in the FCA’s consultation process, with Chalmers not dismissing the possibility of further legal challenge should negotiations fail to resolve their concerns. Other major banks also face consequences, with Barclays setting aside £325m and Close Brothers increasing its provisions by £300m. Both rivals have echoed Lloyds’ criticism, stating the FCA’s definition of redress does not accurately align with actual customer loss or achieve a proportional result.

Lloyds’ chief executive, Charlie Nunn, previously cautioned that the car finance controversy could have wider economic repercussions, potentially dampening foreign investment in Britain. Attempts by high-profile political figures to intervene in earlier legal proceedings were unsuccessful, with the Supreme Court narrowing the scope of the cases in a way that contained the immediate fallout for the banking sector.

The unfolding debate raises broader questions about the balance between consumer protection and proportionate redress in the financial sector, as well as the risk of compensation culture impacting longer-term growth and investment in the UK economy.