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Santander said the £295m “includes estimates for operational and legal costs and potential awards, based on various scenarios using a range of assumptions”.
It added: “There are currently significant uncertainties as to the nature, extent and timing of any remediation action if required, and the ultimate financial impact could be materially higher or lower than the amount provided.”
Lenders had already come under pressure from a Financial Conduct Authority (FCA) investigation into whether drivers were owed compensation for mis-sold car loans.
However, a Court of Appeal ruling last month, which was made over the sale of car loans by Close Brothers and MotoNovo, increased uncertainty about whether many more customers could receive compensation.
Lloyds Bank booked a £450m provision to cover the costs of the FCA investigation earlier this year and Close Brothers scrapped its dividend. However, Santander is the first large lender to act after the Court of Appeal ruling.
The motor finance scandal has revived fears of PPI-style compensation.
Around nine in 10 new cars are bought using loans, and regulators are concerned that customers were not told about bonuses paid to car dealers when selling the loans.