Lloyds Banking Group has reported a sharp 36% drop in its third-quarter profits, as the weight of the UK’s car finance scandal begins to take a toll on the country’s biggest car loan provider.
The bank, which operates through its Black Horse motor finance division, took a significant financial hit after setting aside an additional £800 million in anticipation of potential customer compensation. This brings Lloyds’ total provision for redress to £1.95 billion—the largest among UK lenders caught in the unfolding controversy.
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Car Finance Fallout
At the heart of the issue is a proposed compensation scheme by the Financial Conduct Authority (FCA), which could see lenders forced to pay up to £11 billion in total. The scheme is aimed at resolving concerns over 14 million historic car loan contracts that may have been unfairly structured, particularly where commission arrangements between lenders and car dealers weren’t properly disclosed.
For Lloyds, this latest provision caused its pre-tax profit to drop to £1.17 billion in the three months ending September, down from £1.8 billion in the same period last year.
Uncertainty Around Compensation
Although the FCA has yet to finalise the rules of the compensation scheme, Lloyds has already raised concerns. The bank argues that nearly half of all car loans issued since 2007—around 44%—could fall under the FCA’s proposed redress model.
William Chalmers, Lloyds’ chief financial officer, said the bank is committed to compensating customers where actual harm has occurred but warned that the regulator’s current proposal could go too far.
He stated that the bank is currently engaged in a “constructive dialogue” with the FCA but declined to say whether Lloyds would consider a legal challenge. “It’s just far too early to speculate,” he noted.
Legal and Regulatory Tensions
Lloyds is pushing back against the idea that simply failing to disclose commission payments equals unfair treatment. Chalmers pointed out that a recent supreme court decision, which helped trigger the FCA’s action, did not directly conclude that non-disclosure automatically amounted to unfair conduct.
He also criticised the FCA’s proposed approach to calculating redress, calling it poorly connected to real customer harm.
Despite its reservations, Lloyds says it will continue contributing to the FCA’s consultation process with the hope of finding a balanced solution.
Industry-Wide Impact
Lloyds isn’t alone in facing mounting costs. Just a day earlier, Barclays revealed it was adding another £235 million to its own compensation fund, taking its total to £325 million. While Barclays no longer offers car finance, it still holds responsibility for legacy loans on its books.
If the FCA’s scheme proceeds as proposed, other lenders are expected to follow suit in setting aside large sums to cover similar payouts.
The regulator is aiming to begin the compensation process in 2026, but the scheme remains under consultation and could face legal hurdles, especially if major banks decide to challenge the process in court.
For now, Lloyds is attempting to balance the demands of regulators, shareholders, and affected customers. With almost £2 billion already earmarked for redress, the coming months will be crucial in determining how much more the bank—and the wider industry—may be forced to pay.
FAQs
Why did Lloyds’ profits drop in Q3 2025?
Due to a £800m provision for car loan compensation payouts.
What is the FCA car finance scandal about?
It’s about unfair commission practices in historic car loans.
How much has Lloyds set aside for redress?
£1.95 billion in total so far.
Will Lloyds challenge the FCA in court?
It’s too early to say, but it’s a possibility.
When will compensation payouts begin?
The FCA aims to start payouts in 2026.
