Lloyds Bank has put aside £450 million to cover potential compensation costs as an investigation into car finance is underway. The bank, which provides about one in six car loans in the UK, announced this move alongside record annual profits of £7.5 billion for 2023.

Last month, the Financial Conduct Authority (FCA) started looking into whether customers were overcharged for motor financing arrangements between 2007 and 2021. Experts think this investigation could end up costing the industry billions in compensation.

Lloyds, a big name in the sector with about £15 billion of car loans on its books through its Black Horse division, hasn’t admitted any wrongdoing and says it followed the rules at the time. The investigation focuses on the practice of car dealers getting more commission if they arranged car loans at higher interest rates.

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These arrangements, which have been banned since 2021, encouraged dealers to increase how much customers had to pay, according to the FCA. It has said that if it finds evidence of ‘widespread misconduct’ and consumers have lost out, it will ‘make sure people who are owed compensation receive an appropriate settlement’.

Analysts reckon that lenders could face a bill of up to £16 billion, according to ThisIsMoney. Experts believe Lloyds may have to cough up as much as £2 billion. The bank has said it’s pleased with the ‘clarity’ given by the FCA review, which was triggered by customer complaints sent to the Financial Ombudsman.

Charlie Nunn, the chief executive, stated that the £450 million set aside is a ‘best estimate’, covering legal and other costs linked to the review and possible compensation.

He added: ‘We really welcome the FCA’s investigation into this because there are a complex set of issues here and providing clarity to customers and the industry, we think, is really important.’

The motor finance investigation has already hit Close Brothers, one of Britain’s oldest merchant banks. This month, its shares plummeted by more than 20 per cent after it cancelled its dividend and warned of ‘significant uncertainty’ over the probe.

Other UK banks, which have also been reporting results, have not made provisions, citing a low level of complaints on the issue.