Lloyds Banking Group is setting aside an additional £800m for car finance compensation claims, bringing the total amount allocated by the bank for redress to nearly £2bn.
The company said that the number of eligible claims is expected to be higher than previously thought.
Millions of drivers who bought cars on finance with hidden commission payments between 2007 and 2024 may be eligible for redress.
The Financial Conduct Authority (FCA) published details of its proposed compensation scheme last week.
The FCA said payouts could be due on around 14 million unfair deals, averaging at about £700 each.
This could result in lenders paying out a total of £8.2bn in compensation.
The payouts are over commission arrangements between lenders and dealers, unfair contracts, and inaccurate information given to car buyers.
Lloyds said in a statement: “Based on the FCA proposals in their current form, the potential impact is at the adverse end of the range of previous expected outcomes.”
It said it was setting aside an additional £800m for redress based on “the increased likelihood of a higher number of historical cases… being eligible for redress”.
It said its “best estimate” of the total cost of redress was £1.95bn.
The proposed scheme would be free to access for consumers, although the interest they receive on redress will be much lower than that paid following the payment protection insurance (PPI) scandal.
That scandal cost Lloyds £22bn.
The FCA estimates that 44% of all motor finance agreements made since 2007 will be eligible for payouts.
But a ruling at the Supreme Court in August limited the breadth of these cases.
The FCA advises anyone who wants to make a complaint to get in touch with their lender or broker, and has this guidance on how to complain.
But the Finance and Leasing Association, the body that represents the lending industry, has said the FCA is “overcompensating”.
Lloyds said on Monday that it did not think the FCA’s calculations reflect the actual amount that customers lost out.
It believes customers could therefore get more than the full commission back under the FCA’s proposed scheme.
Under the scheme, eligible car owners would be given the average of what it estimates they overpaid – the commission paid, plus interest.
Another lender, Close Brothers, which is deeply exposed to motor finance compensation, said it was also likely to need to set aside more money for payouts.
In a statement on Thursday, it said its “initial assessment” following the FCA’s proposals was that it would need to increase its current provision of £165m.
However, the company pointed out that uncertainty remained over the final compensation requirements, with the current proposals under consultation.
Consumer campaigners have urged lenders not to fight the FCA’s compensation plans, in order to ensure drivers do not have to wait even longer for redress and to bring a swifter conclusion to the saga.
But Russ Mould, investment director for AJ Bell, said Lloyds “gives the impression it is not happy with the proposed compensation methodology, implying this is not a done and dusted situation”.
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