Treasury Intervenes in Supreme Court Case Amid Motor Finance Mis-Selling Concerns

The Treasury is seeking to intervene in a landmark Supreme Court case that could expose Britain’s motor finance industry to a mis-selling crisis on a scale comparable to the notorious PPI scandal. The government is urging the court to consider the broader implications for investor confidence in the UK’s regulatory framework and to ensure any compensation awarded is “proportionate.”

The Supreme Court will decide whether to permit the Treasury’s intervention, but the move highlights mounting concerns over potential liabilities for motor finance providers. Analysts estimate these liabilities could reach £44 billion, approaching the £50 billion total banks paid in PPI claims.

A Treasury spokesperson said: “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 supporting millions of motorists.”

Market Reaction

The announcement provided a lift to banks involved in motor finance. Close Brothers, a merchant bank with significant car finance operations, saw its shares surge by 20% to 294p. Lloyds Banking Group, owner of Black Horse vehicle finance, experienced a 4% increase to 61p.

RBC Capital Markets called the Treasury’s involvement “clearly positive for the UK banks with motor finance exposure.” However, it cautioned that the ultimate decision rests with the five Supreme Court judges.

Industry Alarm

The case follows an October Court of Appeal ruling that undisclosed commissions on motor loans were unlawful, leaving lenders liable to refund borrowers. The Financial Conduct Authority (FCA) has been scrutinizing the sector’s commission practices, with its review reaching back to April 2007.

As vehicle financing underpins approximately 80% of car purchases in the UK, the potential fallout could be enormous. Banks have already begun preparing for potential payouts. Lloyds has set aside £450 million, while Santander’s UK division holds £295 million. Close Brothers has yet to make provisions but recently suspended its dividend and sold its wealth management arm to raise £400 million in capital.

High Stakes

Jefferies analysts emphasized the importance of proportionate compensation. “The argument that any compensation due should be proportionate is key,” they stated.

If the Supreme Court upholds the Court of Appeal’s decision in April, lenders could face a wave of refunds, forcing a costly restructuring across the sector similar to the PPI debacle.

For now, the Treasury’s intervention provides some optimism for motor finance firms while underscoring the high stakes in what could become one of Britain’s most significant financial crises.