Treasury steps in to protect car loan firms’ payouts

The government has intervened to stop car loan firms from potential multi-billion pound compensation payments over concerns they could have a significant and potentially damaging impact on the motor finance market.

Last year, the Court of Appeal said that lenders and dealers should have communicated clearly to customers how much commission they were making from selling loans, and compensate them when this did not happen.

MotoNovo and Close Brothers, two of the UK’s biggest car finance firms, will appeal the ruling in April after hundreds of thousands more customers came to the financial regulator with similar complaints of being missold car loans.

The government said that while it wants to make sure customers get re-dress, it also wants the motor sector to be able to continue “supporting millions of motorists to own vehicles”.

The vast majority of new cars sold in the UK, and many second-hand ones, are bought with finance agreements.

Some analysts estimate that total payments could reach as much as £30bn in a scandal that could end up being the largest compensation scheme regarding financial products since the payment protection insurance (PPI) saga.

As well as the size of the compensation bill, the Treasury’s submission to the Supreme Court – which it confirmed to the BBC it has received – includes concerns that any uncertainty could undermine the UK’s competitiveness.

It is understood that the Treasury’s intervention could be to show that the UK is still a good place to do business and emerges as Chancellor Rachel Reeves is at the World Economic Forum in Davos, Switzerland to speak to world leaders.

Her budgetary decisions have not buoyed investors’ confidence in the UK economy at as borrowing costs have soared.

Some customers have said the commission on car loans 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 being paid 25% commission, which was added on to what he had to pay back.

“I signed a few documents and then drove away in the car,” he told the BBC in November.

His was part of a landmark case with two other claimants, where the Court of Appeal ruled that the finance company should pay the hidden commission plus interest back to Mr Johnson.

He is due to receive just over £3,200.

In 2021, the Financial Conduct Authority banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer.

It said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate.

Since January last year, the regulator has been considering whether compensation should be paid to people with these deals before 2021.

That created the prospect of banks and other lenders having to make payouts totalling millions of pounds.

In October, the decision at the Court of Appeal broadened the net of those who could receive compensation, potentially increasing the lenders’ final bill to billions of pounds.

The FCA has since been asking affected customers to make complaints, potentially meaning hundreds of thousands have come forward.

The car finance industry is setting aside huge amounts of money for possible future claims.

If multibillion pound fines are imposed on auto lenders, it could also lead to some finance companies going bust, thereby undermining the competitiveness of the market.

Two of the biggest firms in auto loans saw their share prices rise after details of the government’s intervention emerged.

Lloyds Banking Group’s share price rose by nearly 4% while Close Brothers’ stock jumped 21%.