In an extraordinary turn of events, Chancellor Rachel Reeves has launched a rare bid to intervene in the Supreme Court hearing on the car finance commission scandal that threatens to saddle lenders with a colossal £30 billion compensation bill. The Treasury’s unprecedented move sent shockwaves through the financial sector, causing shares of major auto finance providers like Lloyds and Close Brothers to surge on Tuesday.
Treasury Warns of Economic Fallout
In its application to the court, the Treasury sounded the alarm about the potentially devastating economic consequences of the case, arguing it could “cause considerable economic harm” and make car loans both harder to obtain and more expensive for consumers. The department’s submission cautioned that the ruling might “generate a perception that regulation in the UK is uncertain,” a chilling prospect for a sector already grappling with post-Brexit headwinds.
A Call for Proportional Compensation
Central to the Treasury’s argument was the notion that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall.” This stance echoes the concerns of auto lenders, who fear that an outsized compensation bill could upend the motor finance market, forcing some to curtail lending or hike interest rates to offset the staggering costs.
We want to see 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.
– Treasury spokesperson
The High Stakes of Car Finance
The gravity of the situation cannot be overstated. With roughly 80% of new vehicles in the UK purchased through financing arrangements, the industry extended a whopping £16.9 billion in auto loans last year alone. Should the Supreme Court ruling stand, lenders like Santander, Lloyds, and Close Brothers could be on the hook for up to £30 billion in compensation, according to Moody’s estimates. HSBC analysts paint an even bleaker picture, warning the bill could balloon to an eye-watering £44 billion.
- 80% of new UK vehicles bought on finance
- £16.9bn in car loans issued in 2024
- Potential £30-44bn compensation bill for lenders
Investors Spooked by Regulatory Uncertainty
Beyond the immediate financial fallout, executives caution that the lingering uncertainty surrounding the car finance scandal is dampening US investors’ appetite for UK company shares. The specter of seemingly compliant firms being slapped with multibillion-pound fines based on the whims of regulators or courts has left many wary of deploying capital in a market where the rules of the game appear subject to change at a moment’s notice.
Discretionary Commission Arrangements Under Fire
At the heart of the controversy lie discretionary commission arrangements (DCAs), a practice that incentivized car dealerships to charge higher interest rates in exchange for heftier commissions. Although DCAs were outlawed in 2021, a bombshell Court of Appeal ruling last October determined that failing to disclose any commission arrangements—not just DCAs—on car loans constituted a “secret” deal and was thus unlawful, blowing the case wide open and paving the way for a deluge of fresh claims.
A Plea for Clarity and Stability
As the Treasury’s intervention makes plain, the stakes couldn’t be higher. With billions of pounds on the line and the very functioning of the UK’s auto finance market hanging in the balance, policymakers are scrambling to restore a measure of clarity and stability to a sector that underpins the dreams of vehicle ownership for millions of Britons. Whether the Supreme Court will heed the government’s call for proportionality and restraint remains to be seen, but one thing is certain: the reverberations of this case will be felt far beyond the mahogany-paneled halls of justice.
