Lloyds Banking Group (LBG) — which owns Bank of Scotland, Scottish Widows and Halifax — said on Thursday “an additional provision is likely to be required which may be material” due to its exposure to the UK’s car finance mis-selling scandal.

LBG shares fell about 4%.

The warning from LBG comes after the UK’s Financial Conduct Authority said this week that the scandal would cost banks a total of £11 billion.

LBG is the UK’s biggest provider of car finance through its Black Horse business — and the group has already taken a £1.2 billion provision to cover the cost of the compensation scheme.

In a stock exchange statement on Thursday, LBG said: “As previously noted, the group continues to consider the impact and implications of the recently published FCA consultation paper on motor finance.

“Uncertainties remain outstanding on the interpretation and implementation of the proposals but based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which may be material.

“This remains subject to ongoing analysis and review of the proposals. The group will continue to update the market as and when appropriate.”

The UK’s car finance mis-selling scandal involved commissions paid by lenders to car dealerships as part of millions of vehicle sales — which the FCA has said provided an incentive for higher interest rates and were not properly disclosed to consumers.

The compensation scheme will now be applied to about 14 million car finance deals taken out between 2007 and 2024.

Analysts at Citigroup have estimated that LBG could have to set aside another £400 million.

Victoria Scholar, Head of Investment, interactive investor, said: “Lloyds has warned ‘an additional provision is likely’ to cover the cost of compensating motor finance customers and it is likely to be ‘material’. The lender already set aside £1.15 billion but it looks like that figure will rise.

“Lloyds was a significant player in the motor finance mis-selling scandal alongside other lenders like Santander, Barclays and Close Brothers. Earlier this week shares in Lloyds rose after the FCA said the industry would need to pay out £11 billion, which was better than expected.

“However today’s update from Lloyds raises concerns that the lender is still likely to suffer a significant financial hit with some analysts pencilling in a 30% higher figure at around £1.5 billion. Developments from the mis-selling scandal will continue to be an overhang for the bank and other implicated lenders in the sector. The next catalyst for the stock could be in a fortnight when Lloyds is likely to provide more information and clarity as part of the release of its third quarter results.

“Shares in Lloyds have fallen sharply towards the bottom of the FTSE 100 this morning, shedding over 2% reflecting the higher-than-expected financial hit. However the stock is still up over 50% year-to-date thanks to Lloyds’ strong financial performance, robust net interest income thanks to the higher for longer interest rate environment, and increased returns to shareholders via dividends and share buybacks.”