Lloyds Banking Group has estimated the car finance compensation scheme could cost the bank nearly £2 billion, after putting aside an extra £800 million for the mis-selling saga.

The banking group said it will be challenging the watchdog's proposed scheme which it thinks overestimates the amount of compensation that customers need.

This follows the UK watchdog, the Financial Conduct Authority (FCA), publishing the details of its proposed compensation scheme last week.

The FCA said payouts were due on around 14 million unfair deals, averaging at about £700 each.

Having considered the details, Lloyds said it was expecting there to be a higher number of historical motor finance agreements that are eligible for redress than it previously thought.

Lloyds' additional £800 million provision brings the total value of its reserves set aside for the issue to £1.95 billion, including payouts to customers and operational costs.

The bank said this reflected "the increased likelihood of a higher number of historical cases, particularly DCA (discretionary commission arrangement), being eligible for redress, including those dating back to 2007".

Most of the car finance deals covered by the FCA's scheme involve DCAs.

This refers to arrangements whereby brokers, including car dealers, were able to increase interest rates on car loans so they could get more commission.

The FCA said this was unfair to customers who may not have been properly informed about that arrangement so did not have the opportunity to negotiate or find a better deal.

However, Lloyds said it does not believe the FCA's calculations reflect the actual loss to UK consumers.

"The group remains committed to ensuring customers receive appropriate redress where they suffered loss; however, the group does not believe that the proposed redress methodology outlined in the consultation document reflects the actual loss to the customer," Lloyds told investors.

"Nor does it meet the objective of ensuring that consumers are compensated proportionately and reasonably where harm has been demonstrated."

Lloyds believes customers could get more than 100% commission back under the proposed scheme.

"The group will make representations to the FCA accordingly," it added.

Carmaker BMW is seeking a meeting with the Treasury to discuss its concerns with the industry-wide redress scheme, according to reporting in The Times.

Lloyds warns car finance compensation scheme could cost it nearly £2bn