Lloyds Banking Group has reported a 36 per cent fall in third-quarter profits after increasing the amount it has set aside for potential compensation relating to historic car finance agreements. The company told investors that the Financial Conduct Authority’s (FCA) review of discretionary commission models is now a material influence on its forward earnings outlook and that provisions may need to rise again once the regulator confirms the final shape of the redress scheme.
The figures, published in the bank’s latest trading update, show the growing impact of regulatory risk on the sector. Lloyds has built a provision of approximately £1.95 billion for potential repayments, making it the most exposed lender in the market.
Growing Regulatory Exposure
The FCA is examining commission models that operated for more than a decade within dealership-arranged car finance. Under this structure, brokers were able to influence the customer’s interest rate and benefit financially when the rate was set at a higher level. The regulator’s provisional view is that this incentive model created an unfair outcome for borrowers who were not told how the pricing was constructed at the time of sale.
Although the consultation has not yet concluded, lenders have already begun to revise their assumptions. The volume of agreements issued under this model between 2007 and 2024 has led analysts to treat the outcome as a systemic redress event rather than a narrow compliance issue. Lloyds’ numbers reflect this shift: instead of a one-off charge, the bank now treats the exposure as a continuing liability.
The fall in quarterly earnings follows a period of strong profitability for the banking sector driven by higher interest rates. However, the prospect of a sector-wide compensation framework has offset part of those gains. In earlier commentary, Lloyds’ chief executive suggested the eventual bill for the industry could equate to “twenty years of profitability” if the regulator applies a broad eligibility test.
Sector-wide Implications
Lloyds is not alone in revising its position. Other lenders, including Close Brothers, Secure Trust Bank, and Bank of Ireland Group, have also increased their provisions.
Market commentators say the size of Lloyds’ allocation is a bellwether for what the rest of the banking sector may still need to recognise in upcoming financial statements if the FCA’s framework is applied at scale.
The FCA has proposed that eligibility should be determined primarily by the structure of the agreement rather than by the consumer’s ability to prove individual loss. This approach mirrors the methodology used in other large-scale remediation schemes, where the regulator applies a standardised calculation based on how the agreement was priced.
Investors have reacted cautiously to the development. Although Lloyds retains strong capital buffers, the bank’s leadership has acknowledged that final costs remain difficult to estimate until the FCA completes its process. The consultation is expected to conclude later this year, with final rules to follow thereafter. The timing of payouts would then depend on how lenders implement their remediation plans and the sequencing of consumer contact exercises.
For motorists who are unsure about their position, completing a preliminary check can provide clarity ahead of the final scheme. It does not require supporting documents at the initial stage and returns an early indication based on the same criteria under regulatory review. Once the FCA confirms the scheme, those who fall within scope would then transition into the formal redress process run by the lender.
As the sector positions itself for implementation, the early eligibility checks available now serve as the first step for borrowers who wish to understand whether their past agreement may qualify.
