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Chancellor Rachel Reeves on Monday launched a bid to shield car loan providers 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 a forthcoming Supreme Court case, amid concerns that banks and other lenders could face a compensation bill costing tens of billions of pounds.
Reeves fears that the case could cause chaos in the motor finance and car industry, making it harder for consumers to get loans. About 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 that have been encouraging car finance customers to file complaints to the Financial Ombudsman.
Shares in Lloyds Banking Group and Close Brothers rose more than 5 per cent and 15 per cent respectively on Tuesday after the Financial Times reported the Treasury’s attempt to intervene in the case.
Lloyds owns the country’s largest car finance lender Black Horse. Close Brothers has the highest relative exposure to the sector and has lost more than half of its market value over the past year.
“In our view, there has been a clear sentiment change from both the regulator [Financial Conduct Authority] and the government on this topic in the last two months, with both institutions rallying behind the banks,” said Benjamin Toms, an analyst at RBC Capital Markets.
Reeves, who is at the World Economic Forum in Davos this week trying to drum up investment in Britain, fears the huge potential payouts would have a chilling effect on the banking sector, stunt growth and damage the UK’s pro-business reputation, according to people close to the chancellor.
Santander is reconsidering its presence in the UK, according to people familiar with the matter, as it contends with lower returns on its ringfenced business relative to other markets. In November, it set aside £295mn to cover the potential costs of mis-sold car loans.
In April, the Supreme Court is due to hear an appeal brought by car loan providers challenging an October ruling from the Court of Appeal that sided with consumers who complained about “secret” commissions on car loans.
The judgment that it was unlawful 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 have estimated the total cost of compensation could reach £44bn, echoing the £50bn paid out by banks after the scandal of the mis-selling of payment protection insurance.
In a submission to the Supreme Court, seen by the Financial Times, the Treasury claims the case has “potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers”.
The Treasury application said that the case might “generate a perception that regulation in the UK is uncertain”. Last week, Reeves called in regulators to push them into sweeping away rules that hinder growth.
It also argued that if liability was established, then the Treasury would seek to persuade the Supreme Court that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall”.
Treasury officials argue that rather than taking sides with the banks against wronged consumers, the government wants to maintain the viability of a finance sector vital for the purchase of both new and second-hand cars.
“If lenders have broken the law then consumers should receive compensation proportionate to the losses they have suffered,” said one Reeves ally.
“However, the chancellor’s concerned that the judgment risks using a sledgehammer to crack a nut. That would be bad for consumers and bad for the industry.”
Judges including Lord Reed, president of the Supreme Court, and his deputy Lord Hodge are due to hear the landmark case at the start of April.
The Supreme Court, which replaced the appellate committee of the House of Lords as the UK’s highest court in 2009, permits official bodies to apply to intervene in cases it hears.
Permission is granted only if the court thinks the intervention will offer “significant assistance” to the judges who will hear the case.
The Treasury’s move will be welcomed by UK lenders, which have held urgent talks with the government to warn of potential turmoil in the consumer credit sector. Part of the discussions have centred around the possibility that the government would introduce new legislation, said a person familiar with the debates.
Lloyds chief executive Charlie Nunn has also previously called on the government to step in as he warned that the October court ruling had fuelled an “investability problem” for the UK.