Treasury’s attempt to stop car finance case reaching court blocked

The Supreme Court will hear a case in April in which finance firms will try to overturn a Court of Appeal ruling that it was unlawful for lenders to pay car dealers a commission for arranging a loan without the customer’s consent. The chancellor, Rachel Reeves, had attempted to intervene in the case in support of the lenders but the Treasury’s intervention to prevent possible hurt to the banking system has been rejected.

The decision by five judges not to allow government intervention brings the car finance industry a step closer to facing a compensation bill, which could run into billions of pounds. Indeed, analysts from HSBC have estimated that compensation payments could come close to the £50bn paid out by banks for mis-selling payment protection insurance. 

With the total cost of compensation potentially running to £44bn, several of the leading car finance firms are making provisions to cover potential legal costs and payouts. Lloyds, which owns the UK’s car finance lender Black Horse, has now set aside £1.2bn, up from £450m, leading to a significant drop in its share value.

The car finance scandal stems from a ruling in 2021 by the Financial Conduct Authority (FCA) which banned finance deals where the dealer received a commission from the finance company based on the interest charged to the customer without the customer’s knowledge. The FCA argued that this provided an incentive to the dealer to charge the customer a higher rate of interest than necessary. Since January 2024 the regulator has been considering whether those who took out finance pre-2021 should be entitled to compensation. 

Since then, the October ruling by the Court of Appeal has broadened the number of borrowers who could be in line for compensation payouts. Meanwhile, the FCA has been requesting that those who may have been affected by these types of finance deal to come forward and given that the vast majority of new (and many second-hand) cars are sold with finance agreements there will no doubt be millions of people affected.

 If the Supreme Court finds in favour of those seeking compensation it could have quite an effect on the UK market with finance companies needing to set aside monies for compensation payouts, legal fees and potentially huge fines from the regulator. This could see several finance companies going bust – a number have already seen share prices tumble after Reeves’ failed intervention – which the Treasury argues will be bad for consumers. 

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There’s no doubt that finance deals will still be the most popular way for customers to buy their car. There are concerns however, that in future there will be fewer competitive deals on offer as finance companies look to claw back some of the monies they will have lost in fines, fees and compensation. While it’s obviously correct that those consumers who paid more than they should are compensated, it could be the consumer that foots the bill anyway, in the end.