Labour moves to cut car finance compensation payouts to save banks

The Treasury under Labour chancellor Rachel Reeves is seeking to influence the outcome of the ongoing car finance scandal. She warned that a barrage of payouts, which could cost the industry billions, would damage the UK’s image as a hub for business.

Towards the end of 2024, the Court of Appeal ruled in a landmark case that finance firms offering car dealers commission without the knowledge of the buyer were breaking the law. This opened up the possibility of compensation for affected consumers, which could add up to more than £30billion in payouts.

A challenge by the two firms involved in the case – Close Brothers Ltd and Firstrand Bank Ltd – is due to be heard by the Supreme Court in April. Meanwhile, the Financial Times has uncovered a submission to the Supreme Court by the Treasury which warns lawmakers that the case has the “potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers”.

Interventions by the government in Supreme Court cases are uncommon, but not unheard of. Established in 2009, the UK’s highest court is independent of the government, however, official bodies can apply to intervene if they are able to offer “significant assistance”.

The Treasury, headed by Chancellor Rachel Reeves, said in a statement that its input would help the Court come to a “fair and proportionate judgment that ensures compensation to consumers that is proportionate to the losses they have suffered, and allows the motor finance sector to continue playing its role in supporting millions of motorists to own vehicles.”

While the government’s involvement has been welcomed by investors – shares in the aforementioned Close Brothers Ltd, alongside Lloyds Banking Group rose 15 and five per cent respectively following the announcement – some banks, such as Santander, are reportedly “reconsidering” their position in the UK market in the light of the 2024 court ruling.

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