Lloyds Banking Group PLC (LSE:LLOY) and other motor finance lenders paid large upfront commissions to individual car dealerships, according to a report from the Guardian.
The newspaper said court documents showed the lenders made these payments, with the filings stating that the practice encouraged the car salespeople to favour those loan providers even if it would result in higher payments for the buyer.
As these advance commission arrangements were not disclosed they created a conflict of interest that was likely to harm customers, the filings allege.
Yesterday, Lloyds set aside a further £700 million to cover a potential hit from motor finance mis-selling for its motor finance arm, Black Horse.
This took total provisions for the issue to £1.15 billion, which the bank said was its “best estimate” of the impact ahead of a Supreme Court hearing next month.
Some analysts forecast a combined £44 billion bill for the motor finance lenders, including Lloyds, Close Brothers Group PLC (LSE:CBG), Barclays PLC (LSE:BARC), Santander UK, Secure Trust Bank PLC (LSE:STB) and Vanquis Banking Group PLC (LSE:VANQ).
Earlier this week, the Supreme Court batted off Chancellor Rachel Reeve's attempt to intervene in the case, which is being heard after the Court of Appeal ruled in October that commission payments made by lenders were unlawful.
Reeve's Treasury department was keen to ensure that any redress doled out by the court and regulators does not cause too much "economic harm" as most cars in the UK are bought using loans.