£800 Million Blow: Lloyds Stumbles as Motor Finance Scandal Shakes Britain’s Banks
LONDON – The reckoning that’s been rumbling beneath Britain’s banking industry has finally erupted. Lloyds Banking Group has seen its quarterly profit tumble by more than a third after setting aside a staggering £800 million to cover the growing fallout from a car loan mis-selling scandal. The latest charge pushes Lloyds’ total compensation fund close to £2 billion — the clearest sign yet that the country’s biggest lenders are in deep trouble over their past practices.
The Financial Conduct Authority (FCA), the city’s watchdog, is proposing a massive redress scheme that could force banks to return between £8.2 billion and £9.7 billion to customers who were sold car loans with murky, commission-driven markups dating back to 2007. For Lloyds, a heavyweight in motor finance through its Black Horse division, the hit feels uncomfortably familiar — a chilling echo of the payment protection insurance (PPI) fiasco that once drained over £50 billion from Britain’s banks.
Lloyds reported a pre-tax profit of £1.17 billion for the third quarter, down 36% from £1.8 billion a year earlier. After tax, the number plunged 42% to about £778 million. Executives blamed the decline squarely on the compensation provisions. The pain doesn’t stop there: the bank has trimmed its 2025 target for return on tangible equity to around 12%, down from 14%, signalling slimmer profits ahead.
Still, Lloyds isn’t backing down quietly. Its leadership insists they’ll challenge parts of the FCA’s approach, setting up a likely battle between the lender and the regulator. The final cost remains anyone’s guess, but it’s clear this fight will drag on — and it won’t be cheap.
How the Scandal Took Root
At the centre of this storm lies a controversial system once known as “discretionary commission arrangements.” For years, car dealers and brokers were allowed to tweak the interest rate on customer loans. The higher the rate they charged, the fatter their commission became.
It doesn’t take an economist to spot the flaw. That setup tempted dealers to raise rates simply to pocket more cash — all while customers had no idea why their loans cost so much. The FCA banned the practice in 2021, but millions of loans issued before that date are now under the microscope.
The regulator’s consultation paper, CP25/27, estimates that about 14.2 million loan agreements could be deemed unfair. Average compensation might hover around £700 per borrower, and the FCA expects roughly 85% of affected customers to seek payouts.
Unlike the messy, case-by-case chaos that defined the PPI debacle, the FCA wants a unified, industry-wide scheme this time. The goal? Speed, fairness, and clarity. The final plan is due by the end of the year, with a key decision on complaint deadlines expected by December 4, 2025.
“PPI 2.0” — The Past Comes Knocking
Consumer champions haven’t minced words. Martin Lewis, founder of MoneySavingExpert, has already branded the saga “PPI 2.0.” His warning went viral, prompting hundreds of thousands of people to file complaints before the window potentially narrows. “Banks will fight tooth and nail,” he said, urging consumers not to wait for permission to act.
Inside Lloyds, the pressure is mounting. During the bank’s annual general meeting in May 2025, whistleblower Paul Carlier accused the board of “lowballing” the size of its expected losses, predicting the real figure could run into the billions. His comments struck a chord among shareholders frustrated by what they see as a recurring pattern of poor oversight.
Yet not everything in Lloyds’ latest report was bleak. Net interest income — a measure of how much the bank earns from lending — climbed 7% year-on-year to £3.45 billion, slightly ahead of forecasts. Beneath the surface turmoil, the core business still hums along.
Even so, the long shadow of the scandal will stretch over 2025 and beyond. Lloyds now expects operating costs to rise to about £9.7 billion next year as it grapples with the sheer scale of the claims process. Across the sector, the FCA believes that administrative and system costs could tack on billions more, tightening the squeeze on profit margins for every lender involved.
The Road Ahead — Foggy and Treacherous
The next few months will prove critical. The FCA’s decision in December about extending complaint deadlines will show how tough the regulator plans to be. Then, early in 2026, the final policy statement will spell out exactly how compensation must be calculated and paid.
For Lloyds, the £1.95 billion already set aside could be just the opening act. The bank’s pledge to dispute the FCA’s figures all but guarantees a long and costly standoff. Its share price, already jittery, will likely stay under pressure while investors wait for clarity.
For millions of British drivers, this marks long-awaited recognition of an unfair system that quietly drained their wallets. For the banks that engineered and profited from it, the reckoning has only begun — and the final bill could make the PPI scandal look like a warm-up act.
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