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Chancellor Rachel Reeves on Monday launched a bid to protect car loan providers from multibillion-dollar 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 an upcoming Supreme Court case amid fears banks and other lenders face a compensation bill worth tens of billions of pounds.
Reeves fears the case could wreak havoc on the auto financing and auto industries and make it harder for consumers to get loans. Around 80 percent of new vehicles in the UK are purchased on a finance basis.
If the Treasury is successful, it will deal a blow to consumer groups and claims 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 boost investment in Britain, fears the huge potential payouts would have a chilling effect on the banking sector, slowing growth and damaging the country’s pro-business reputation.
Santander is is reconsidering its presence in the UKaccording to people familiar with the matter, as the company struggles with lower revenue from its dedicated business compared to other markets. In November it set aside £295m to cover the potential costs of mis-sold car loans.
In April, the Supreme Court is scheduled to hear the appeal from car loan providers Challenging an October Court of Appeal ruling That was on the side of consumers complaining about “secret” commissions on auto loans.
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 British 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 be £44 billion, equivalent to the £50 billion paid out by the banks following the mis-selling scandal of residual debt insurance.
In a submission to the Supreme Court, seen by the Financial Times, the Treasury claims the case “has the potential to cause significant economic harm and could impact on the availability and cost of car finance for consumers”.
The Treasury filing said the case “could create the impression that regulation in the UK is uncertain.” Last week Reeves called regulators to push them to sweep away rules that hinder growth.
It also argues that if liability is found, the Treasury would seek to persuade the Supreme Court that “any remedy should be proportionate to the actual loss suffered by the consumer and avoid the creation of a windfall.”
Treasury insiders argue that rather than siding with banks against wronged consumers, the government wants to preserve the viability of a financial sector that is crucial to buying new and used cars.
“If lenders have broken the law, consumers should receive compensation proportionate to the losses they suffered,” said a Reeves ally.
“However, the Chancellor fears that the verdict runs the risk of cracking a nut with a sledgehammer. 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 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 officials to request intervention in the cases it hears.
Authorization will only be granted if the court considers that the intervention will provide “significant assistance” to the judges hearing the case.
The Treasury’s move will be welcomed by UK lenders, who have expressed urgency Talks with the government to warn of possible turmoil in the consumer credit sector. Part of the discussions centered on the possibility that the government would introduce new laws, a person familiar with the debates said.
Charlie Nunn, chief executive of Lloyds, has also done this before called on the government to intervene He warned that the October court ruling had exacerbated an “investment problem” for the UK.
