- Moody’s had said the motor credit sector could face damages of up to £30bn
- The FCA’s top lawyer suggested total compensation payouts could top £50bn
HM Treasury is looking to protect the vehicle finance sector from huge compensation bills, fearing this could damage Britain’s economy, according to reports.
The Financial Times said on Tuesday the Treasury had taken the rare step of applying to intervene in an upcoming Supreme Court case, which may lead to car loan providers stumping up tens of billions to motorists.
In April, the court will hear an appeal brought by Close Brothers and MotoNovo owner FirstRand challenging a landmark ruling made in October.
Three months ago, the Court of Appeal declared that lenders could not offer vehicle sellers a commission on finance deals if the car purchaser had not given their ‘fully informed consent’ to the payment.
After the verdict, ratings agency Moody’s warned the motor credit industry could face total damages of up to £30billion.
However, the Financial Conduct Authority’s top lawyer, Stephen Braviner Roman, suggested the figure could top the £50billion banks paid to settle payment protection insurance claims.
Payouts: HM Treasury is looking to protect the vehicle finance sector from huge compensation bills, fearing this could damage Britain’s reputation for business
The Treasury’s appeal to the Supreme Court claimed the case has the ‘potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers’.
It also said that any liabilities should be ‘proportionate to the loss actually suffered by the consumer and avoid conferring a windfall’.
Shares in car loan companies reacted strongly to the FT report, with Lloyds Banking Group rising 3.8 per cent to 60.9p and Close Brothers soaring 21.9 per cent to 298p by Tuesday midday.
Secure Trust Bank soared 25 per cent to 435p, while Vanquis, Paragon and Bank of Ireland Group also moved higher.
Close Brothers appears to have the most relative exposure to the scandal, with broker RBC Capital Markets predicting the merchant bank could pay as much as £640million.
The firm briefly suspended new credit deals following the October decision, having already stopped dividend payouts since February in response to the FCA beginning a probe into the motor lending sector.
The FCA started a probe into historical car loan agreements earlier last year after some consumers claimed their compensation for so-called ‘discretionary commission arrangements’ (DCAs) was wrongly turned down by lenders.
DCAs enabled vehicle dealerships and brokers to set the interest rate on a car buyer’s finance agreement, thereby incentivising them to make loans more expensive.
They were eventually prohibited in 2021, having accounted for approximately three-quarters of all motor loan deals between 2007 and 2020.
One former major provider of DCAs, Lloyds Banking Group-owned Black Horse, could pay total compensation of £4.2billion in relation to the car finance scandal, according to investment bank KBW.
Meanwhile, Santander UK has set aside £295million to cover potential redress costs, but KBW estimates the firm might be left with a €1.6billion bill, while Barclays could have to fork out £277million.
S&P Global said: ‘The ultimate cost to affected banks is highly uncertain given the FCA’s pending decision on the parameters of any customer redress scheme for DCAs, which will occur after the conclusion of the legal process.’
Close Brothers appears to be the most exposed to the motor finance row
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
Saxo
Saxo
Get £200 back in trading fees
Trading 212
Trading 212
Free dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.