Reeves' Bid to Intervene in Car Finance Scandal Blocked by Court

The Supreme Court has rejected Rachel Reeves's attempt to intervene in the car finance scandal, dealing a blow to banks but a boost to millions of drivers. The Chancellor had sought to intervene and block tens of billions of pounds in compensation payouts to drivers who had been mis-sold car loans. The Treasury argued that the scandal threatened to undermine the UK economy and deter investment, saying that pay outs must be limited.

However, the Supreme Court on Tuesday rejected the application. It is scheduled to hear the case on car finance mis-selling in early April. The case revolves around whether salesmen have a duty to inform customers about bonuses, commissions, or fees they received when they sell drivers loans to finance car deals. An early ruling suggested they do, opening up the possibility of a flood of legal claims from drivers who were not informed when they bought their vehicles. Estimates suggest the bill for compensation could total up to £38bn.

The Chancellor had sought to step in to shield banks from a flood of lawsuits. The Treasury said compensation must be proportionate to the harm suffered from any alleged mis-selling. The failure of the application triggered a slump in share prices for banks and lenders. Close Brothers fell more than 8pc, Vanquis was down more than 6pc, and Lloyds Bank was among the biggest fallers on the FTSE 100, down 1.9pc.

The Supreme Court's decision now means only the Financial Conduct Authority will have an opportunity to intervene in the case, which is set to be heard in April. The UK's financial watchdog had requested to intervene in the case separately over concerns that a ruling against lenders could destabilise Britain's banking industry.

Gary Greenwood at Shore Capital said: "The situation and potential outcome remain subject to significant uncertainty, and although the mood music had arguably been improving, this news highlights that the process will be far from straightforward in its resolution."

In its application to intervene, the Treasury had said a ruling against lenders at the Supreme Court could "adversely affect the United Kingdom’s reputation as a place to do business, with a consequent impact upon economic growth." Charlie Nunn, chief executive of Lloyds Bank, warned in December that the car finance mis-selling scandal was putting investors off investing in the UK.

He said: "Investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation – which is then having a significant retrospective look back — is bleeding across the whole economy."

The Supreme Court is reviewing a ruling made by the Court of Appeals in October, which shocked the industry and went against long-established convention. Lenders Close Brothers and FirstRand, which owns car financing company MotoNovo, later won permission to appeal the ruling at the Supreme Court.



The Treasury and FCA both submitted requests to intervene in the Supreme Court's review in January. News of the Treasury's application caused shares in leading British lenders to surge in January on hopes they would be shielded from claims.

A Government spokesman said: "We respect the Court’s decision to not grant our application to intervene in the Hopcraft case and will monitor it closely."

The Supreme Court's decision on the car finance scandal has significant potential economic implications for both the UK banking sector and consumers. The ruling could affect the availability and cost of motor finance for consumers, generate uncertainty about UK regulation, and impact the UK's reputation as a place to do business. If the ruling goes against the lenders, it could lead to a flood of legal claims from drivers who were not informed about the commissions, bonuses, or fees received by salesmen when they sold them loans to finance car deals. This could result in billions of pounds in compensation payouts, which could in turn lead to lenders increasing the cost of motor finance to cover their potential liabilities. Additionally, lenders may become more risk-averse and reduce the availability of motor finance to consumers, making it harder for people to obtain car loans. This could have a knock-on effect on the wider economy, as reduced car sales could impact the automotive industry and related sectors.

In response to the ruling on car finance mis-selling, lenders and car manufacturers should consider the following strategic adjustments to mitigate risks and maintain market competitiveness:

1. Transparency and Disclosure: Lenders should ensure full transparency in their loan agreements, clearly outlining all fees, commissions, and charges. This aligns with the FCA's 'treating customers fairly' principle and helps build trust with customers. Car manufacturers should work closely with lenders to ensure customers are fully informed about the financing options and any associated costs.
2. Risk Assessment and Management: Lenders should conduct thorough risk assessments to identify potential areas of mis-selling and address them proactively. This could involve reviewing sales processes, training staff, and implementing robust compliance procedures. Car manufacturers should also assess their risks, particularly in relation to their dealer networks, and ensure they are not involved in any mis-selling practices.
3. Compensation and Redress: Lenders should set aside funds to cover potential compensation payments, as major banks like Santander and Lloyds have already done. This helps manage financial risks and ensures customers are treated fairly. Car manufacturers should work with lenders to establish clear processes for identifying and compensating affected customers.
4. Regulatory Engagement: Lenders and car manufacturers should engage with the Financial Conduct Authority (FCA) and other relevant regulators to understand their expectations and ensure compliance with regulations. They should also monitor regulatory developments and adapt their strategies accordingly, as seen in the Treasury's intervention in the Supreme Court case.
5. Investment in Technology and Digital Platforms: Lenders and car manufacturers can invest in digital platforms and technology to streamline processes, improve transparency, and reduce the risk of mis-selling. This could include online loan applications, digital disclosure tools, and customer engagement platforms.
6. Reputation Management: Lenders and car manufacturers should proactively manage their reputations, addressing any negative publicity or customer concerns promptly and transparently. This helps maintain customer trust and market competitiveness.

By implementing these strategic adjustments, lenders and car manufacturers can better mitigate risks, maintain market competitiveness, and ensure they are operating in compliance with relevant regulations and industry standards.