Lloyds Car Finance Scandal: Ethical Crisis

Lloyds Car Finance Scandal: Ethical Crisis

The Lloyds Banking Group car finance scandal is not just about mis-selling. It is a wider issue of poor governance, a breakdown in ethics and increasing distrust from investors. Lloyds has now put aside £1.15 billion to deal with claims linked to discretionary commission arrangements, where dealerships were earning more commission by charging customers higher interest rates, a practice the FCA banned in 2021 (Hooker, 2025).

The situation got worse after the Court of Appeal ruled it unlawful to pay these commissions without informed consent from customers. This caused backlash in the motor finance industry. Lloyds CEO Charlie Nunn described the fallout as an “invest ability problem” for the UK, saying the decision goes against decades of regulatory understanding and could create legal uncertainty for financial institutions (Quinio & Aliaj, 2024). With Supreme Court appeal still pending and complaints rising, the damage to Lloyds Banks’ reputation is likely to increase.

From an ethical perspective, this clearly goes against the duty-based principles. Abah (2024) explains that ethical leadership and internal controls are essential to financial integrity. But Lloyd’s approach to lending which was based on incentives and a lack of transparency, shows that these values were not properly built into the business. Deontological ethics, which focus on doing the right thing regardless of the outcome, are particularly important in consumer finance. Fairness and honesty are not optional extras and should be standard practice.

This also raises concerns about how regulation is enforced. Abakah and Hyacinthe Yirlier Somé (2024) found that companies who were under close regulatory watch show better disclosure and benefit from lower equity costs. While the UK does not follow the same model as the US SEC, the point still stands that if businesses do not feel closely monitored, they are more likely to push boundaries. In this case, the FCA’s delay in banding DCAs may have allowed the problem to go on longer than it should have.

Even with strong financial figures, stakeholder confidence is decreasing. Lloyd’s quarterly revenue came in at £4.4 billion, but pre-tax profits still missed expectations and return on tangible equity dropped below target (Quinio, 2025). At the same time their £4 billion digital transformation programme has been overshadowed by this scandal, which is another reminder that strong numbers do not mean much if governance is weak.

Lloyd’s handling of the non-financial disclosure also shows room for improvement. Agostini et al. (2021) argue that proactive and high-quality disclousres can actually support financial results and strengthen investor relationships. But in this case, Lloyds only acknowledged the growing complaints in their annual report once the pressure from media and regulators increased. Investors now expect more than just reports on previous mistakes, but want to see a forward looking commitment to doing better.

There is also a behaviour side to all of this. Aman et al. (2024) point out that financial ethics have a major influence on decision-making and trust. For customers, the idea of hidden commissions confirms the view that financial services can be exploitative. This kind of mistrust does not just effect Lloyds, it makes people less willing to engage with financial products more broadly and is a problem for the whole industry.

This scandal shows what happens when profit is prioritised over doing what is right. Business models that reward unfair behaviour may seem profitable in the short term, but they come with serious risks, including legal costs, compensation payouts, brand damage and investor pullback.

For Lloyd’s fixing this means more than compliance. It requires real change, where ethics and transparency are part of the culture, not just added on when things go wrong. Without that, no amount of digital investment or cost saving will rebuild the publics trust.

 

References

Abah, F. (2024). Understanding How Experienced Financial Accounting Leaders Instill and Maintain Ethics in Financial Accounting Processes in Their Respective Organizations (Order No. 31562319). Available from ProQuest Dissertations & Theses Global. (3105620186). https://www.proquest.com/dissertations-theses/understanding-how-experienced-financial/docview/3105620186/se-2

References

Abakah, A. A., & Hyacinthe Yirlier Somé. (2024). The effect of SEC regulatory oversight on implied cost of equity. Financial Review, 59(4), 875–896. https://doi.org/10.1111/fire.12390

Agostini, M., Costa, E., & Korca, B. (2021). Non-Financial Disclosure and Corporate Financial Performance Under Directive 2014/95/EU: Evidence from Italian Listed Companies. Accounting in Europe, 19(1), 1–32. https://doi.org/10.1080/17449480.2021.1979610

Akila Quinio. (2025, February 20). Lloyds sets aside another £700mn after car finance probe. @FinancialTimes; Financial Times. https://www.ft.com/content/6cc01fb6-06b3-445e-8189-194c5b3d4446

Akila Quinio, & Ortenca Aliaj. (2024, December 4). Lloyds boss warns of UK “investability problem” after motor finance ruling. @FinancialTimes; Financial Times. https://www.ft.com/content/1ecdaceb-63e8-4fe6-be29-50441c31ee60

Aman, H., Motonishi, T., & Yamane, C. (2024). Do financial ethics matter in risky asset investment of households? Evidence from Japan. International Journal of Economic Policy Studies, 18(2), 387–414. https://doi.org/10.1007/s42495-024-00134-2

Hooker, L. (2025, February 20). Lloyds sets aside £1.2bn for car loan mis-selling scandal. BBC News. https://www.bbc.co.uk/news/articles/cj0q422mn70o

Kalyeena Makortoff. (2025, February 20). Lloyds puts aside a further £700m for compensation over car finance scandal. The Guardian; The Guardian. https://www.theguardian.com/business/2025/feb/20/lloyds-puts-aside-another-700m-for-compensation-over-car-finance-scandal