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The government has intervened to prevent car loan companies from paying out possible multi-billion pound compensation, amid fears they could have a significant and potentially damaging impact on the car finance market.
Last year, the Court of Appeal said lenders and brokers should have clearly communicated to customers how much commission they were making on loan sales and compensated them when this did not happen.
MotoNovo and Close Brothers, two of the UK’s biggest car finance companies, will appeal the decision in April after hundreds of thousands more customers approached the financial regulator with similar complaints about mis-sold car loans .
The government said that while it wanted to ensure customers were rehabilitated, it also wanted the car sector to be able to continue “helping millions of motorists own a vehicle”.
The vast majority of new cars sold in the UK, as well as many used cars, are purchased under finance deals.
Some analysts estimate the total payouts could reach as much as £30 billion in a scandal that could become the largest compensation scheme involving financial products since the Payment Protection Insurance (PPI) saga.
Aside from the size of the compensation bill, the Treasury’s submission to the Supreme Court – which it confirmed to the BBC it had received – cites concerns that any uncertainty could harm the Kingdom’s competitiveness -United.
It is understood the Treasury intervention could be aimed at showing the UK remains a good place to do business, which emerges as Chancellor Rachel Reeves is at the World Economic Forum in Davos, Switzerland, to address addressed to world leaders.
His budget decisions have failed to boost investor confidence in the UK economy, as borrowing costs have soared.
Marcus Johnson
Marcus Johnson said he wasn’t told about commission when he bought a car
Some customers said car loan commissions were agreed in secret.
Marcus Johnson, 34, from Cwmbran, Torfaen bought his first car – a Suzuki Swift – in 2017.
However, he said he was not informed that the car dealership was receiving a 25% commission, which was in addition to what he had to repay.
“I signed a few documents and then drove away,” he told the BBC in November.
He was part of a landmark case with two other claimants, in which the Court of Appeal ruled that the finance company must pay the hidden commission plus interest back to Mr Johnson.
He is expected to receive just over £3,200.
In 2021, the Financial Conduct Authority banned transactions in which the dealer received a commission from the lender, based on the interest rate charged to the customer.
She said this would cause the buyer to be charged a higher interest rate than necessary.
Since January last year, the regulator has been considering whether compensation should be paid to people who entered into these agreements before 2021.
This has created the prospect of banks and other lenders being forced to make payments totaling millions of pounds.
In October, the Court of Appeal’s ruling widened the scope of who could receive compensation, potentially increasing lenders’ final bill to billions of pounds.
The FCA has since asked affected customers to lodge a complaint, which could mean hundreds of thousands of people have come forward.
The auto finance industry sets aside huge sums of money for possible future claims.
If multi-billion pound fines were imposed on car lenders, it could also lead to the collapse of some finance companies, undermining market competitiveness.
Two of the largest auto loan companies saw their stock prices rise after details of the government intervention were released.
The Lloyds Banking Group share price rose almost 4% while that of Close Brothers jumped 21%.
