Banking giant Lloyds has allocated £450 million to cover potential costs related to an investigation into car finance deals conducted by the UK’s financial regulator, the Financial Conduct Authority (FCA).

The FCA initiated an investigation last month to examine whether consumers were overcharged for car loans. The probe focuses on commission arrangements between brokers arranging car financing and lenders, where brokers earned commission based on the interest rates set for customers.

Lloyds disclosed this provision as it reported a significant increase in annual profits, with pre-tax profits rising to £7.5 billion last year, a 57% increase from the previous year.

The investigation concerns discretionary commission arrangements that allowed car dealers to adjust interest rates on loans, potentially inflating costs for consumers to boost broker commissions. These arrangements were banned by the FCA in 2021, estimated to save drivers £165 million annually.

As Lloyds owns Black Horse, one of the UK’s largest motor finance providers, it is considered highly exposed to potential compensation claims arising from the investigation.

While Lloyds has set aside £450 million for potential compensation, the final amount could vary. Analysts speculate that the total compensation bill for the industry could be substantial, potentially running into billions of pounds.

Lloyds’ Chief Executive Charlie Nunn emphasized the need for clarity regarding any misconduct or losses on behalf of customers, welcoming the FCA’s investigation for providing such clarity.

Matt Britzman, an equity analyst at Hargreaves Lansdown, noted that while Lloyds’ provision is lower than some expectations, uncertainty remains about the final outcome of the review and its impact on the bank.