Lloyds’ Profits Slide as Car Finance Costs Catch Up with the Bank
Lloyds has announced a significant profit decrease as the car finance scandal rages on.
Lloyds Banking Group has reported a 36 per cent drop in third-quarter profits, and the main reason is no longer a mystery: the cost of sorting out historic car finance agreements is now moving from forecast to reality. The company has set aside close to £1.95 billion so far, reflecting the scale of refunds that may be required once the Financial Conduct Authority (FCA) finalises its redress scheme.
This is no longer a technical accounting provision tucked away in the footnotes. In practical terms, it means this issue is not a short-term regulatory niggle but a structural cost that the bank expects to work through over time.
Why This Suddenly Matters
For more than a decade, many car finance deals were priced using what is known as a discretionary commission model. The dealership selling the car could influence the interest rate on the agreement and, in many cases, earn more commission when the rate was set higher. The customer saw the monthly payment but not the incentive behind it.
The FCA’s view is that this created a conflict of interest and that customers could not make an informed decision because the pricing mechanism was not explained to them. That is the basis for compensation.
The regulator is still consulting on the final details of the scheme, but the direction is already clear enough for banks to start increasing their reserves. Lloyds now has the largest pot in the sector, but others are following the same pattern.
A Wider Shift in the Industry
Close Brothers, Secure Trust Bank, and Bank of Ireland Group have all raised their provisions in recent months. Together, they point to a shift in attitude: lenders are no longer treating this as a niche issue affecting a small number of agreements. They now expect a broad programme of repayments applying to a significant number of customers.
Investors have taken notice too. Higher interest rates helped banks deliver strong results over the past two years, but the upcoming redress scheme is pulling part of that profitability back in the other direction.
One of the clearest signals came earlier this year, when Lloyds’ chief executive said the potential cost to the industry could amount to the equivalent of twenty years of profitability once the scheme is applied at full scale. That gives a sense of why provisions are rising so sharply now.
What this Means for Drivers
Although the FCA has not yet published the final rules, the model it is working with suggests that eligibility will be decided by the structure of the agreement, not by whether a customer can prove they were individually overcharged. This is similar to other large consumer redress programmes, where the regulator applies a standard formula to past transactions.
As a result, many drivers are now checking whether their old finance agreement is likely to fall within scope. The window is wide: it covers contracts arranged through dealerships between 2007 and 2024, mainly PCP and HP products.
Early eligibility tools have been created to help motorists understand their position before the FCA’s final framework goes live. They look at the same structural markers the regulator is testing.
These checks are designed to be simple and do not require paperwork at the initial stage. They give borrowers an early answer on whether their agreement is likely to qualify, so they are not left waiting until the final FCA announcement.
What Comes Next
The regulator is expected to finalise its scheme later this year. Once it does, lenders will begin contacting customers who fall within the scope and setting out what they can expect in terms of repayment and timing.
For anyone unsure where their own agreement sits, carrying out a preliminary eligibility check now is the simplest way to get clarity. It allows motorists to understand whether they are likely to be covered once the scheme opens, without having to make a formal complaint or submit evidence upfront.
