Chancellor’s bid to intervene in finance compensation case rejected

An attempt to intervene in a landmark case concerning hidden commissions in car finance by the Chancellor, Rachel Reeves, has been rejected by the Supreme Court.

The court’s decision is a major a blow to lenders facing a compensation bill potentially running into billions of pounds.

Reeves had urged the court to prevent what she described as “windfall” payouts to borrowers who were unknowingly charged additional fees due to secret commission arrangements between lenders and car dealers. 

However, judges dismissed the chancellor’s application, filed in January, in a ruling that rattled financial markets.

Shares of motor finance lenders, which had surged following the Treasury’s intervention, fell sharply on Monday. Lloyds and Close Brothers, two of the UK’s largest car loan providers, saw their stock drop by 3.8% and 8.5%, respectively.

Reeves’ intervention came after pressure from motor finance providers, who argued that massive compensation payouts could destabilise the sector, leading to reduced loan availability or higher interest rates. 

The Chancellor, however, denied accusations of yielding to financial industry lobbying or acting against consumer interests.

“There is nothing pro-consumer about making it harder for people to buy an affordable car for their family. That would be bad for working families,” Reeves said last month at the World Economic Forum in Davos, Switzerland.

The car finance scandal has drawn comparisons to the infamous payment protection insurance (PPI) mis-selling crisis, with analysts warning that the final cost to lenders could reach £44 billion.

The controversy erupted after an October Court of Appeal ruling dramatically expanded a Financial Conduct Authority (FCA) investigation into car finance commissions. 

The court found that car dealers receiving undisclosed commissions for arranging loans had engaged in unlawful practices.  

Lenders including Close Brothers and FirstRand are now seeking to overturn that ruling in a Supreme Court hearing scheduled for April.

Gary Greenwood, a banking analyst at Shore Capital, said the Supreme Court’s rejection of the Treasury’s intervention was “a disappointment to the market”. 

In spite of the case’s outcome remaining uncertain, he said: “We hope that a common-sense ruling can eventually be reached that punishes those that deserve to be punished while sparing those that do not.”

The Supreme Court also dismissed separate intervention attempts by the consumer campaign group Consumer Voice and the Financing and Leasing Association (FLA) representing car finance firms. 

However, the FCA has been granted permission to participate, along with the National Franchised Dealers Association (NFDA), which represents car dealerships.

Until the Supreme Court case decision is issued, the motor finance sector faces continued uncertainty over potential compensation liabilities and the broader implications for consumer lending.