By Anna Wise

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Lloyds Banking Group has warned it may need to set aside a “material” sum of extra money to cover the cost of the UK watchdog’s proposed motor finance compensation scheme.

Lloyds already has a provision of £1.2 billion reserved for the mis-selling issue.

But it said it was likely this will not be enough, having read through the proposals published by the Financial Conduct Authority (FCA) on Tuesday.

Lloyds has significant exposure to the car finance industry through its Black Horse business.

The bank told investors: “Uncertainties remain outstanding on the interpretation and implementation of the proposals but based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which may be material.

“This remains subject to ongoing analysis and review of the proposals. The group will continue to update the market as and when appropriate.”

Some 14 million car finance agreements are due compensation under the FCA’s proposed scheme.

This is because motor firms broke the law and its rules when they sold loans to people between 2007 and 2024, by not properly disclosing information to customers about commission arrangements.

This meant people were treated unfairly and potentially not given a fair deal.

The regulator estimated that the industry could foot a bill totalling £8.2 billion worth of payouts, based on around 85% of eligible customers taking part in its scheme.

This rises to £11 billion once the cost of implementing the scheme and doing the work is taken into account.

Gary Greenwood, an equity analyst for Shore Capital, said he estimates the motor finance industry has made around £2 billion of combined total provisions, “suggesting significant further provisions may be required”.