The Treasury is seeking to intervene in a major High Court case that could drag Britain’s car finance industry into a costly mis-selling crisis on a par with the notorious PPI scandal.
Ministers want the court to consider the wider impact on investor confidence in the UK regulatory system and, most importantly, to ensure that any compensation orders remain “proportionate”.
It is up to the Supreme Court to decide whether to allow Treasury intervention. However, the government’s pressure to influence the outcome highlights growing concern about potential liabilities which some analysts estimate could reach £44bn – roughly equivalent to the £50bn that banks have faced over PPI claims.
A Treasury spokesman said: “We want to see a fair and proportionate ruling that ensures consumers are compensated proportionately for the losses they have suffered, and allows the car finance sector to continue to support millions of motorists.”
The news gave an immediate boost to banks heavily involved in auto financing. Close Brothers, a commercial bank with a large car finance business, saw its shares rise 20 per cent to 294p. Lloyds Banking Group, which owns car finance company Blackhorse, rose 4 per cent to 61 pence.
Private sector analysts welcomed the Treasury’s move. RBC Capital Markets described it as “a clear positive for UK banks with exposure to auto finance”. However, he also noted that “there is a clear separation of powers in the UK, so the final outcome will only be determined by the opinions of five judges of the Supreme Court.”
The Court of Appeal raised alarm throughout the industry in October when it ruled that undisclosed commissions on car loans were illegal, making lenders responsible for returning borrowers’ money. The Financial Conduct Authority (FCA) has been investigating the sector’s use of commissions, and its review dates back to April 2007. About 80 per cent of car purchases in the UK are financed, making the potential ramifications particularly significant.
Banks have already started setting aside money for potential payouts: Lloyd’s has set aside £450m, while Santander’s UK division has set aside £295m. Close Brothers has not yet made a provision, but in recent months it has suspended its dividend and sold its wealth management arm to boost capital by £400m.
“The argument that any compensation owed should be proportionate is the key argument,” Jefferies analysts stressed. If the Supreme Court upholds its decision in April, the Court of Appeal decision could force a wave of refunds across the industry, undermining some of Britain’s biggest lenders and forcing a sector-wide restructuring reminiscent of the PPI saga. For now, the Treasury’s intervention offers a glimmer of hope for car finance companies, but it also underscores the high risks involved.
Comments are closed, but trackbacks and pingbacks are open.