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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 historic 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 an upcoming High 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 wreak havoc on the motor finance and car industry, making it harder for consumers to get loans. Around 80 per cent of new vehicles in the UK are bought on finance.
If the Treasury is successful, it will deal a blow to consumer groups and claims management companies who have encouraged car finance customers to lodge complaints with the Financial Ombudsman.
The chancellor, who is at the World Economic Forum in Davos this week trying to drum up investment in Britain, fears the huge potential payout will have a chilling effect on the banking sector, hamper growth and damage the reputation of pro- business of the country.
Santander is reconsidering its presence in the UK, according to people familiar with the matter, as it struggles with lower returns in its beleaguered business compared to other markets. In November, it set aside £295 million to cover the potential costs of mis-sold car loans.
In April, the High Court will hear an appeal brought by car loan providers, overturning an October Court of Appeal ruling that sided with consumers who complained about “secret” car loan commissions.
The ruling that it was 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 prompted thousands of pounds in compensation payments from lenders FirstRand Bank and Close Brothers.
HSBC analysts have estimated that the total compensation cost could reach £44bn, echoing the £50bn paid out by banks following the payment protection insurance mis-selling scandal.
In a High Court submission, seen by the Financial Times, the Treasury claims the case has “the potential to cause significant economic harm and could affect the availability and cost of motor finance for consumers”.
The Treasury application said the case could “generate a perception that regulation in the UK is uncertain”. Last week Reeves called on regulators to push them to remove rules that stifle growth.
He also argues that if liability is established then the Treasury would seek to convince the High Court that “any remedy must be proportionate to the loss actually suffered by the consumer and avoid the award of a windfall”.
Treasury officials argue that rather than side with banks against unfair consumers, the government wants to preserve the viability of a vital financial sector for buying new and used cars.
“If lenders have broken the law, then consumers should receive compensation commensurate with the losses they have suffered,” said a Reeves ally.
“However, the chancellor is concerned that the trial 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 High Court, and his deputy Lord Hodge, will 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 it hears.
Leave is only granted if the court thinks the intervention will provide “significant assistance” to the judges hearing the case.
The Treasury’s move will be welcomed by UK lenders, who have held emergency talks with the government to warn of potential turmoil in the consumer credit sector. Some of the discussions have centered around the possibility of the government introducing new legislation, said a person familiar with the debate.
Lloyds chief executive Charlie Nunn has also previously called on the government to step in after he warned the October court ruling had fueled an “investment problem” for the UK.
