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Chancellor Rachel Reeves on Monday launched a move to protect car lenders from multibillion-pound payouts in a landmark mis-selling case, after the Treasury warned it could damage Britain’s reputation as a place of 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 could face a compensation bill costing tens of billions of pounds.
Reeves fears this case will cause chaos in the auto financing sector and the auto industry, making it more difficult for consumers to obtain loans. In the UK, around 80 per cent of new vehicles are purchased using finance.
If the Treasury succeeds, it will deal a blow to consumer groups and claims management companies who encourage car finance customers to lodge complaints with the Financial Ombudsman.
The chancellor, who is attending the World Economic Forum in Davos this week to try to attract investment to Britain, fears the huge potential payouts will have a chilling effect on the banking sector, stunt growth and damage reputation favorable to the country’s businesses.
Santander is reconsider its presence in the United Kingdomaccording to people familiar with the matter, as it faces lower returns on its ring-fenced businesses compared to other markets. In November it set aside £295m to cover potential costs linked to mis-sold car loans.
In April, the Supreme Court is scheduled to hear an appeal by auto lenders. challenge an October decision of the Court of Appeal who sided with consumers who complained about “secret” commissions on auto loans.
The ruling that it was illegal for banks to pay commission to a car dealer without the customer’s informed consent has sent shockwaves through the UK banking system and triggered thousands of pounds in compensation from lenders FirstRand Bank and Close Brothers.
HSBC analysts estimate the total cost of compensation could reach £44bn, echoing the £50bn paid out by banks after the payment protection insurance mis-selling scandal.
In a submission to the Supreme Court, seen by the Financial Times, the Treasury says the case has “the potential to cause considerable economic harm and could impact on the availability and cost of car finance for consumers”. .
The Treasury’s request says the case could “give the impression that regulation in the UK is uncertain”. Last week called the regulators to push them to sweep away the rules that hinder growth.
It also says that if liability is established, the Treasury would then seek to persuade the Supreme Court that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall”.
Treasury insiders say that rather than siding with the banks against aggrieved consumers, the government wants to maintain the viability of a financial sector vital to the purchase of new and used cars.
“If lenders broke the law, then consumers should receive compensation commensurate with the losses they suffered,” said a Reeves ally.
“However, the Chancellor fears the judgment risks using a hammer to crack a nut. It would be bad for consumers and bad for the industry. »
Judges including Lord Reed, President of the Supreme Court, and his deputy Lord Hodge are due to hear the landmark case in early April.
The Supreme Court, which replaced the House of Lords Appeal Committee as the UK’s highest court in 2009, allows statutory bodies to apply to intervene in cases before it.
Permission is only granted if the court believes the intervention will provide “significant assistance” to the judges hearing the case.
The Treasury’s decision will be welcomed by British lenders, who deemed it urgent talks with the government to warn of possible disruptions in the consumer credit sector. Part of the discussions focused on the possibility of the government introducing new legislation, a person familiar with the proceedings said.
Lloyds chief executive Charlie Nunn has also already asked the government to intervene warning that the October court ruling had fueled an “investment problem” for the UK.