Reeves intervened in the UK car finance mis-selling case to protect creditors

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Chancellor Rachel Reeves on Monday launched a bid to protect car loan providers from multi-billion pound payments. After the Treasury warned that Britain’s reputation as a business destination could be damaged.

The Treasury has taken the unusual step of seeking permission to intervene in an upcoming Supreme Court case amid fears that banks and other creditors could be forced to pay tens of billions of pounds in compensation.

Reeves fears the issue could create chaos in the motor finance and auto industry, making it harder for consumers to get credit. 80 per cent of new vehicles in the UK are bought on finance.

If the Treasury is successful, it will hurt consumer groups and claims management companies that have been encouraging car finance customers to take their complaints to the Financial Ombudsman.

The chancellor, who tried to drum up investment in Britain at the World Economic Forum in Davos this week, fears the high fees will have a chilling effect on the banking sector, slow growth and damage the country’s pro-business reputation.

Santander is reconsidering its presence in the U.K. as it struggles with lower revenues in its business, which is allegedly tied to other markets, according to people familiar with the matter. In November it set aside £295mn to cover the costs of mis-sold car loans.

In April, the Supreme Court was to hear an appeal by car loan providers against an October Court of Appeal ruling, along with consumers who complained about “secret” commissions on car loans.

The ruling that it is illegal for banks to pay car dealership commissions without the customer’s consent has sent shockwaves through the UK banking system and resulted in thousands of pounds in compensation from lenders Firststrand Bank and Close Brothers.

Analysts at HSBC estimated the total cost of compensation could reach £44bn, echoing the £50bn paid out by banks after the mis-selling of payment protection insurance.

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

The Treasury filing said the case “may give the impression that regulation in the UK is uncertain”. Last week, Reeves called on regulators to push for repeal of laws that stifle growth.

It also argues that if liability is established, the Treasury will seek to convince the Supreme Court that “any remedy must be proportionate to the loss to the consumer and prevent windfall.” It will be saved.”

Treasury experts say the government wants the financial sector to be viable for both new and second-hand car purchases, rather than siding with banks for aggrieved consumers.

A Reeves partner said: “If creditors break the law, consumers should be compensated commensurate with their losses.”

“However, the chancellor fears that the ruling will use a sledgehammer to crack a nut. This is bad for consumers and bad for the industry.

A jury, including Supreme Court President Lord Reid and his deputy Lord Hodge, is due to hear the landmark case in early April.

In the year The Supreme Court, which replaced the House of Lords Appellate Committee as the UK’s highest court in 2009, allows official bodies to apply to intervene in hearing cases.

Permission is granted only if the court considers that the intervention would be of “significant assistance” to the judges hearing the case.

The Treasury’s move will be welcomed by UK lenders who have held urgent talks with the government to warn of potential turmoil in the consumer credit sector. Part of the discussion centered on whether the government could enact new legislation, a person familiar with the debate said.

Lloyds chief executive Charlie Nunn has called on the government to step in, warning that the court’s decision in October has created an “investment crisis” for the UK.