Motor finance review: Lloyds Bank sets aside £450 million for mis-sold car loans

Banks are setting millions aside for potential claims after the City watchdog expressed concerns that firms aren’t considering commission complaints fairly

Car loanmoney banknote on agreement document or car insurance application form
(Image credit: Getty Images)

Lloyds Bank has set aside £450 million for potential customer redress as lenders prepare for the costs of a regulatory review into the mis-selling of car finance.

Motorists who purchased a car or van with finance before the end of January 2021 could be due compensation in what is being described as potentially “the new payment protection insurance (PPI)" scandal.

The Financial Conduct Authority (FCA) banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021 as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.

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But the City watchdog is concerned at the level of complaints that firms are rejecting about the issue which are later being upheld by the Financial Ombudsman Service (FOS) or county courts.

The FCA this morning said it has launched a review into historical motor finance commission arrangements and sales across several firms to see if there has been any misconduct and if compensation needs to paid.

MoneySavingExpert founder Martin Lewis suggested on social media that payouts could be on the scale of PPI redress that was close to £40 billion.

Lloyds Bank revealed in its 2023 annual report that it has made a provision of £450 million to cover the potential impact of the review into car finance arrangements, which would concern its Black Horse brand - one of the largest providers.

What is the FCA motor finance market review?

Discretionary commissions were banned for car finance in January 2021 but providers have still been dealing with complaints about the issue.

It said firms are rejecting most complaints because they consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements.

But the FOS has upheld issues that have been rejected by firms in recent cases and the FCA predicts this could prompt a significant increase in other complaints.

Claims have also been brought in the county courts, some of which have been upheld. 

The regulator said this suggests a significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.

The FCA is using its powers to pause all complaints about motor finance agreements as it reviews the sector and these sales more widely.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance,” the FCA says.

This pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.

Commission payments were one of the key factors in the PPI scandal as bank customers often didn’t realise they were paying extra.

Lewis adds that the FCA wouldn’t do this unless it was likely to find wrongdoing.

He said this could result in a redress scheme for all affected customers or rules for firms to consider when considering complaints.

“The payout would be either the interest on loans, the commission, or the whole loan,” he says.

“We’re possibly talking thousands back for many.”

Marc Shoffman

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.