In a significant blow to Chancellor Rachel Reeves, the UK Supreme Court has rejected her controversial attempt to intervene in a high-stakes case that could see lenders on the hook for up to £44 billion in compensation over alleged secret commissions paid to car dealers. The decision sent shares of major motor finance providers tumbling, with Lloyds and Close Brothers each dropping over 3% on the news.
Chancellor’s Failed Bid to Curb “Windfall” Payouts
At the heart of the dispute is a growing scandal involving lenders accused of paying undisclosed commissions to car dealerships that arranged loans for consumers. Following an October court ruling that vastly expanded a Financial Conduct Authority probe into the practice, the industry has been bracing for a tidal wave of compensation claims that some analysts warn could collectively cost banks and financing firms up to £44 billion.
Amid intense lobbying from the lending sector, Chancellor Reeves last month took the unusual step of seeking to intervene in the case before the Supreme Court. Her application urged justices to avoid handing borrowers impacted by the secret commissions what lenders have decried as undeserved “windfall” payouts.
“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.”
– Chancellor Rachel Reeves
The chancellor has faced criticism that her move caters to the financial industry at the expense of wronged consumers. But Reeves has dismissed accusations of yielding to City pressure, insisting her aim is to prevent a shock to the motor finance market that could ultimately hurt car buyers.
Lenders Warn of Market Disruption
Banking groups have sounded alarm bells that compensation bills stemming from the commissions scandal could approach the scale of the payment protection insurance (PPI) mis-selling saga. The lending sector contends that massive payouts could cause financing firms to collapse, pull back on auto loans, or jack up interest rates – dealing a hit to consumers looking for vehicle financing.
Two major motor finance players – Close Brothers and FirstRand – are now appealing to the Supreme Court to overturn lower court rulings against the industry. Hearings in the pivotal case are scheduled for early April.
Analysts: Intervention Rejection a Market “Disappointment”
News of the Supreme Court rebuffing the Treasury’s attempt to intervene landed as a blow to lenders, whose shares had soared following Reeves’ initial move in anticipation it could pare back their ballooning compensation bills. Analysts described the setback as a “disappointment” for the market that underscores the deep uncertainty still hanging over the outcome of the case.
“Ultimately, the situation and potential outcome remains subject to significant uncertainty… 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.”
– Gary Greenwood, Shore Capital banking analyst
Consumers Groups Cry Foul
The Supreme Court also denied requests by consumer advocacy organization Consumer Voice and car dealer trade group the National Franchised Dealers Association to weigh in on the proceedings. Consumer Voice slammed the decision as “extremely disappointing,” arguing the public feels betrayed by a lack of transparency around the commissions lenders paid to dealerships.
“An overwhelming majority of car finance customers have told us they are concerned about the practice of dealers being paid commission. And it’s little wonder, as people trust their car dealer to act in their best interests when arranging finance. Yet, this trust is clearly being abused by some dealers in the market.”
– Alex Neill, Consumer Voice co-founder
Regulator to Have Say in Case
While rejecting the other requests, the court is allowing the Financial Conduct Authority, which regulates the lending industry, to intervene in the proceedings. This sets the stage for the UK’s top financial watchdog to have significant influence over the direction of the landmark case – and with it the scale of the auto finance sector’s potential compensation tab.
As the motor finance commissions scandal winds its way through the legal system, all eyes are now on the Supreme Court’s April hearing. With tens of billions of pounds – and the stability of the car loans marketplace – at stake, the industry, regulators, and consumer groups alike are anxiously awaiting the justices’ ruling on the limits of lenders’ liability. The outcome is poised to have profound ramifications for the future of auto financing in the UK.
