Lenders warn of bigger hit to finances from £11bn car loan compensation plan

The UK’s biggest motor finance providers have warned that the financial impact of a proposed compensation scheme could be larger than first expected, as the sector braces for a total bill of around £11 billion under the Financial Conduct Authority’s (FCA) plans.

Lloyds Banking Group and Close Brothers said they may need to increase the money they have set aside to cover potential costs linked to historic mis-selling in car finance. The updates sent shares lower on Thursday, with Lloyds down around 2% and Close Brothers’ stock falling by about a tenth during afternoon trading.

Close Brothers, which has a sizeable motor finance arm, told investors that its existing £165 million provision is likely insufficient if the FCA’s scheme proceeds as proposed. The firm cited ongoing uncertainty around the consultation’s outcome but signalled it is preparing for a “material increase” in reserves.

Lloyds, which already holds a £1.2 billion provision, also warned that it could face a “material” uplift to that amount, depending on the final shape of the scheme. Santander said it will review the consultation, having previously set aside £295 million. Barclays, with a smaller market share in motor finance, has provisioned £80 million.

What the FCA’s proposal covers

The FCA’s plan relates to car finance agreements sold between 2007 and 2024, where firms are said to have failed to adequately disclose commission arrangements to customers. The regulator has indicated that many customers may not have received a fair deal as a result of inadequate disclosure, and that the sector will need to compensate affected borrowers.

Approximately 14 million agreements could be in scope for compensation. The FCA estimates about 85% of eligible customers may take part in the scheme. Based on that participation rate, the regulator puts potential payouts at around £8.2 billion, rising to roughly £11 billion once implementation and administrative costs are included.

The FCA’s latest estimates sit at the lower end of its previously outlined range of £9 billion to £18 billion. Around 30 lenders—representing about 89% of the UK car finance market—are expected to be covered by the measures.

Market and investor reaction

The prospect of higher provisions weighed on sector shares. Close Brothers’ update prompted a sharp drop in its stock price, with investors interpreting the “material increase” language as a sign that costs could be heavier than anticipated. Lloyds’ indication of a potential uplift to its already significant provision also unsettled markets.

Analysts noted that, while the headline £11 billion sector-wide figure was initially taken as better than the worst-case scenarios, the subsequent warnings from individual lenders imply meaningful, lender-specific impacts could still be ahead.

Key figures at a glance

• Total industry bill: estimated £11 billion including implementation costs.
• Estimated payouts: £8.2 billion, assuming around 85% participation.
• Scope: agreements from 2007 to 2024; around 14 million potentially eligible.
• Number of lenders in focus: about 30, covering roughly 89% of the market.
• Provisions disclosed:
  • Lloyds Banking Group: £1.2 billion (possible material increase).
  • Close Brothers: £165 million (likely insufficient under current proposal).
  • Santander: £295 million (under review).
  • Barclays: £80 million.

Outlook for lenders

Investors will watch closely for the FCA’s final decision following the consultation period and for updated guidance from lenders on their expected liabilities. The degree of customer participation, the methodologies used to assess redress, and the timeline for processing claims will all influence the ultimate cost.

Some market commentators suggest that, despite the aggregate bill landing at the lower end of earlier estimates, individual banks with meaningful exposure to historic motor finance could still face sizeable additional charges. One analyst noted that recent updates rekindle concerns that costs might exceed current provisions, keeping the issue as an overhang for several lenders.

In the near term, banks are likely to continue stress-testing reserves, assessing operational demands for handling claims, and communicating potential impacts on capital and dividends. The broader sector impact will hinge on final FCA rules, the speed of implementation, and the shape of any consumer redress process.