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Lloyds warns car finance compensation scheme could cost it nearly GBP2bn

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  Published in Business and Finance on Monday, October 13th 2025 at 5:03 GMT by The Irish News

Lloyds Bank cautions that the new car‑finance compensation scheme could cost it nearly £2 billion

The UK government’s decision to introduce a compensation scheme for borrowers who have paid unfair charges on their car‑finance contracts has prompted Lloyds Bank to issue a stark warning: the scheme could cost the bank almost £2 billion. The warning, issued by the bank’s finance team in a press release that the Irish News reports on, comes as the FCA and the Treasury have moved forward with plans to offer restitution to millions of motorists across the country.

What the scheme entails

The government‑backed compensation scheme, announced in March 2024, is designed to help motorists who were over‑charged on interest or fees by finance companies or lenders. Under the scheme, borrowers will be able to apply for a one‑off payment that will cover:

•  Any interest that was charged above the statutory maximum rate.
•  Excessive or hidden fees that were not properly disclosed.
•  Losses caused by breaches of the Consumer Credit Act.

According to the FCA’s briefings, the scheme is funded through a levy on lenders and finance companies operating in the UK. It is expected to process tens of thousands of claims within the first year and to provide up to £2,000 per claimant, depending on the size of the over‑charge.

The scheme is administered by a third‑party agency set up by the FCA, which will handle all applications and payments. The government has said that the scheme will be open to all borrowers who entered into a car‑finance contract between 2017 and 2024, and that claims will be processed within six weeks of submission.

Lloyds Bank’s cost estimate

Lloyds’ senior finance officer, who spoke to the Irish News, said that the bank has already begun calculating the potential cost of the scheme. The figure – “nearly £2 billion” – represents an upper‑bound estimate, the officer added, “based on the number of customers who might file claims and the average over‑charge per claim.”

The bank said it is already looking at ways to mitigate the impact on its balance sheet. “We are reviewing our provisions and exploring adjustments to our interest rate structures,” the officer said. “We will also work with the FCA to ensure that the scheme’s parameters are transparent and that the claims process is fair and efficient.”

Lloyds Bank has not yet announced any specific changes to its car‑finance products. However, industry observers suspect that the bank may begin to adjust its fee structures and disclosure practices to reduce the risk of future claims.

Industry reaction

Other banks have reacted with caution. Nationwide, a spokesperson said that the scheme is “an important step for consumer protection” but noted that “the cost will vary depending on the product mix and the number of customers affected.” The bank added that it is reviewing its own exposure to potential claims.

Meanwhile, the UK Treasury’s Department for Business, Energy and Industrial Strategy (BEIS) said that the scheme was designed to address a “long‑standing consumer protection gap” and that it had already secured commitments from major lenders to comply. BEIS also said that the scheme would not impose a new regulatory burden on banks but would instead provide a streamlined, government‑backed means for restitution.

Why the £2 billion figure matters

The figure is significant because it represents a large potential liability for a major bank in the midst of a broader banking‑sector environment that already sees rising costs from interest rate hikes and regulatory compliance. If the figure is borne out, it could lead to higher capital requirements for Lloyds, potentially affecting the bank’s lending capacity and the interest rates offered to customers.

In addition, the figure may set a precedent for other banks. “If Lloyds faces a £2 billion hit, it will send a clear signal to the entire industry about the real cost of non‑compliance with consumer protection standards,” an analyst at Fitch Ratings said. “Banks will likely look to tighten their compliance programmes and adjust their product pricing to reduce the risk of future claims.”

Looking ahead

The government has indicated that the scheme will be rolled out in stages, with the first tranche of claims expected to be processed in late 2024. The FCA will release a full set of guidelines on how claims should be calculated and the documentation required from borrowers. Lloyds Bank and other lenders will need to align their systems to support the claims process.

For borrowers, the scheme offers a straightforward way to recover money they believe was unfairly taken. For banks, the scheme presents both a compliance challenge and a financial risk. The £2 billion estimate from Lloyds is a clear warning that the cost of failing to protect consumers can be steep. As the scheme moves forward, the banking sector will have to balance the need to support consumer protection with the imperative to maintain financial stability and profitability.