The chancellor, Rachel Reeves, has launched a rare bid to intervene in a supreme court hearing in the car finance commission scandal that could reduce the £30bn-plus compensation bill lenders currently face.
Shares in Lloyds and Close Brothers, two of the biggest providers of motor finance, surged on Tuesday after the Treasury submitted an application to the court arguing it should be able to contribute evidence in a case that could “cause considerable economic harm” and make car loans harder to get and more expensive.
The Treasury submission on Monday added that the case might “generate a perception that regulation in the UK is uncertain”. The letter, first reported by the Financial Times, also warned judges that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall”.
The Finance and Leasing Association, which represents car lenders ranging from large high street banks such as Barclays to the finance arms of manufacturers such as Ford and Volkswagen, also applied to intervene in the case.
The lobby group has argued that a major compensation bill could disrupt the motor finance market, forcing some lenders to offer fewer loans or hike interest rates to make up for their increase in costs. About 80% of new vehicles in the UK are bought on finance, with the industry having lent £16.9bn to UK car owners last year
News of the Treasury’s intervention sent Lloyds shares up nearly 4% on Tuesday, making it the top FTSE 100 riser, while Close Brothers surged 22%. Lloyds is the most exposed among high street lenders. Close Brothers one of the defendants in the supreme court case, alongside FirstRand, the South African owner of MotoNovo.
Ministers are concerned the supreme court case will undermine its efforts to get regulators to do more to support growth and ensure the financial services sector is more competitive internationally, which has included a push by Reeves for post-financial crisis rules to be eased.
Executives have already warned that uncertainty over the car finance scandal is dampening the appetite of US investors for UK company shares. They say there is concern about investing when apparently regulation-abiding firms could be later fined billions of pounds on the basis of a ruling by a UK regulator or court.
It also emerged over the weekend that the Spanish lender Santander is reviewing the future of its UK business amid mounting frustrations over regulations, including the potential impact of the car finance affair, which could cost the lender £1.8bn.
Lenders including Santander, Lloyds and Close Brothers could face a combined bill of up to £30bn unless the court ruling is overturned, according to the rating agency Moody’s. Analysts at HSBC say the bill could reach as high as £44bn.
after newsletter promotion
The car finance commission scandal initially gained pace in January last year, when the Financial Conduct Authority launched an investigation into discretionary commission arrangements (DCAs) on car loans after a flood of claims into the Financial Ombudsman Service. DCAs, which were banned in 2021, allowed car dealerships to earn more commission by setting higher interest rates, providing an incentive to make loans more expensive for consumers.
A shock court of appeal ruling in October opened up the otherwise contained investigation. Judges determined that failing to disclose the sum and terms of any commission arrangements on car loans – not just historic DCAs – amounted to a “secret” deal and was unlawful.
It caused panic among lenders and opened the door to a fresh wave of claims.
Commenting on Monday’s submission, the Treasury said: “We want to see a fair and proportionate judgment that ensures compensation to consumers that is proportionate to the losses they have suffered, and allows the motor finance sector to continue playing its role in supporting millions of motorists to own vehicles.”
