Rachel Reeves intervenes in car finance mis-selling case to protect lenders

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Chancellor Rachel Reeves launched a bid on Monday to protect car lenders from multibillion-pound payouts in a landmark mis-selling case, 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 creditors could face tens of billions of pounds in compensation bills.

Reeves fears the lawsuit could cause chaos in the motor finance and car industry, making it harder for consumers to get loans. Around 80 per cent of new cars in the UK are bought on finance.

If the Treasury is successful, it will deal a blow to consumer groups and demand management companies that are encouraging 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 payout will have a chilling effect on the banking sector, stalling growth and damaging the country’s business reputation.

Santander Hall Rethinking its presence in the UKAs it disputes lower returns on its ringfenced business compared to other markets, according to people familiar with the matter. In November it set aside £295mn to cover potential costs of mis-sold car loans.

An appeal brought by car loan providers will be heard in the Supreme Court in April Challenging an October ruling from the Court of Appeal That favors consumers who have complained about “hidden” commissions on car loans.

The ruling, making it illegal for banks to pay a commission to a car dealer 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.

HSBC analysts estimate the total cost of compensation could reach £44 billion, echoing the £50 billion paid by banks after the payment protection insurance mis-selling scandal.

In a submission to the Supreme Court seen by the Financial Times, the Treasury claimed the case “has the potential to cause significant economic damage and could affect the availability and cost of motor finance for consumers”.

The Treasury plea said the case “may create an impression that regulation in the UK is uncertain”. Reeves last week Regulators have been called To remove the rules that hinder their growth.

It also argues that if liability is established, the Treasury will seek to persuade the Supreme Court that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid an impropriety”.

Treasury insiders argue that instead of taking the side of banks against wrongdoing consumers, the government wants to preserve the viability of a financial sector vital to buying both new and second-hand cars.

“If lenders have broken the law, consumers should be compensated in proportion to their losses,” said a Reeves aide.

“However, the chancellor is concerned that judgment risks using a sledgehammer to crack a nut. It will be bad for consumers and bad for the industry.”

Judges, including Supreme Court President Lord Reid and his deputy Lord Hodge, will hear the landmark case in early April.

The Supreme Court, which replaced the House of Lords’ Appellate Committee as the UK’s highest court in 2009, allows government agencies to apply to intervene in its hearings.

Permission is granted only if the court feels that the intervention would provide “substantial assistance” to the judges hearing the case.

The Treasury’s move will be welcomed by UK creditors, which has been held urgently Talk to the government to warn of potential turmoil in the consumer credit sector. Part of the discussion centered on the possibility that the government would introduce new laws, a person familiar with the debate said.

Lloyds chief executive Charlie Nunn was earlier Urged the government to come forward As he warned that the October court ruling created an “investmentability problem” for the UK.