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Chancellor Rachel Reeves on Monday launched a bid to protect car loan providers from paying out multi-billion pounds in a landmark case of mis-selling, after the Treasury warned it could damage Britain’s reputation as a place to do business.
The Treasury has taken the unusual step of seeking permission to intervene in the upcoming Supreme Court case, amid concerns that banks and other lenders could face a compensation bill costing tens of billions of pounds.
Reeves fears the case could cause chaos in the financial sector and the auto industry, making it harder for consumers to get credit. Around 80 per cent of new vehicles in the UK are bought with finance.
If the Treasury is successful, it will deal a blow to consumer groups and claims management firms that have encouraged car finance customers to lodge complaints with the Financial Ombudsman.
The chancellor, who is trying to boost investment in Britain at the World Economic Forum in Davos this week, fears the huge potential payouts would have a chilling effect on the banking sector, slowing growth and damaging the country’s business reputation.
It’s Santander reconsidering its presence in the UKas it struggles with lower returns on its limited operations compared to other markets, according to people familiar with the matter. In November, it set aside £295m to cover potential loan costs for mis-sold cars.
In April, the Supreme Court is scheduled to hear an appeal filed by car loan providers challenging the October Court of Appeals ruling which sided with consumers who complained about “secret” commissions on car loans.
The ruling that it is illegal for banks to pay commission to a car salesman without the customer’s informed consent sent shockwaves through the UK banking system and triggered thousands of pounds in compensation payments from lenders FirstRand Bank and Close Brothers.
Analysts at HSBC estimate the total cost of damages could reach £44bn, equal to the £50bn paid out by banks after the payment protection insurance mis-selling scandal.
In a Supreme Court submission seen by the Financial Times, the Treasury argued the case had “the potential to cause significant economic harm and affect the availability and cost of motor finance for consumers”.
The Treasury Department’s request states that the case could “create the impression that regulation in the UK is unsafe”. Last week Reeves invited regulators push them into erasing rules that inhibit growth.
It also claims that if liability is found, the Ministry of Finance will seek to convince the Supreme Court that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid making a windfall”.
Finance Ministry insiders claim that instead of siding with banks against delinquent consumers, the government wants to maintain the viability of the financial sector, which is crucial for buying both new and used cars.
“If the lenders broke the law, consumers should be compensated commensurate with the losses they suffered,” said one Reeves ally.
“However, the chancellor is concerned that the ruling risks using a sledgehammer to crack a nut. That would be bad for consumers and bad for the industry.”
Judges, including Lord Reed, the president of the Supreme Court, and his deputy Lord Hodge are due to hear the landmark case in early April.
The Supreme Court, which replaced the House of Lords’ appeals committee as the UK’s highest court in 2009, allows official bodies to apply to intervene in cases they hear.
Permission is granted only if the court considers that the intervention will offer “significant assistance” to the judges who will try the case.
The move by the Treasury will be welcomed by UK lenders, who have deemed it urgent talks with the government warn of potential turmoil in the consumer credit sector. Part of the discussions focused on the possibility of the government introducing new laws, a person familiar with the discussions said.
Lloyds chief executive Charlie Nunn is also earlier called on the government to step in as he warned that the October court ruling had sparked an “investment problem” for the UK.
