Lord Merton is the father of Larry Grey and a family friend of the Crawleys. In 1891, when Lady Mary was born, he stood as her godfather.
Background
Little is known of his background, but he mentions not being happily married to his wife. He clearly is known and trusted by the Crawley family to have been named Mary's godfather. He also wishes to have studied medicine, but his father did not think it suitable for someone of his stature.
He has at least two children: Larry, who works in banking, and Tim, who is a diplomat.
Series 3
He was invited to Downton Abbey with his son Larry in 1920 for Mary's wedding.
When Larry insults Tom Branson after drugging him to make him appear rude and drunk, Lord Merton stands angrily along with Robert and Matthew. He apologizes directly to Tom for what his son did, and expresses hope that he will recover in time for the wedding.
Series 4
He later attends lunch at Violet's house where he grows closer to Isobel Crawley, taking a walk with her.
He later sends her flowers, hoping to apologize for his behavior which he felt was rude (they were discussing their children and their occupations, and when he brought up Matthew Isobel revealed her son had died; he had momentarily forgotten who she was).
2013 Christmas Special
He reappears in 1923, and may be admiring Isobel more.