Lloyds has put aside an extra £800m to deal with potential compensation claims resulting from the motor finance investigation by the Financial Conduct Authority (FCA).

The bank had previously set aside a £1.15bn provision to deal with the potential costs of the investigation’s outcome.

Historic motor finance discretionary commission arrangements (DCAs) have been under review by the FCA since January last year.

The regulator’s 2021 ban on DCAs had removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance. However, a high number of complaints from customers to motor finance firms followed, claiming compensation for commission arrangements prior to this ban.

Lloyds, which is one of the most exposed motor finance providers awaiting the FCA’s verdict on a redress scheme, revealed that the additional £800m reflected an “increased likelihood” that a higher number of historical DCA cases could be eligible for redress.

The bank’s latest figure comes after the regulator recently published a consultation paper for its redress scheme, with the FCA estimating last week that the motor finance scandal would cost banks £11bn overall, though it could rise to £12.4bn if all victims applied and secured payouts as part of the scheme.

This also followed a ruling by the Supreme Court in August, which stated that while some motor finance customers would not get compensation because in many cases the commission payments were legal, there were still some circumstances where the failure by firms to properly disclose commission arrangements could be deemed unfair, and therefore unlawful.

In a statement today, Lloyds said: “The current FCA proposals remain a consultation and the ultimate outcome may evolve in response to representations made by various parties as well as further legal proceedings and complaints or any other broader implications of the Supreme Court judgment.

“However, the total £1.95bn provision, including both redress and operational costs, represents the group's best estimate of the potential impact of the motor finance issue.”

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