Treasury steps in to protect car loan firms' payouts

The government has intervened in an attempt to prevent car loan companies from facing huge losses due to potential multi-billion pound payouts, amid concerns this could have a significant and potentially disruptive impact on the car finance market. This follows a Court of Appeal ruling that lenders and dealers should have clearly informed customers of the amount of commission they earned from selling loans, and should provide compensation where they did not.

The UK's two largest car finance firms, MotoNovo and Close Brothers, are set to appeal the ruling in April. This comes after hundreds of thousands of customers lodged similar mis-selling complaints about car loans with the financial regulator. The government has stated that while it wants to ensure customers are compensated, it also wants the automotive industry to continue to "support millions of vehicle owners." Most new cars sold in the UK, as well as many used ones, are purchased through finance agreements.

Some analysts estimate that the total compensation from this scandal could reach as high as £30 billion, potentially becoming the largest financial product compensation scheme since the payment protection insurance (PPI) saga. Beyond the sheer size of the payouts, documents submitted by the Treasury to the Supreme Court (confirmed as received by the BBC) also include concerns that any uncertainty could damage the UK's competitiveness. It is understood that the Treasury's intervention may be to signal that the UK remains a good place to do business, coinciding with Chancellor Rachel Reeves attending the World Economic Forum in Davos, Switzerland, meeting with world leaders.

Some customers say that car loan commissions were agreed in secret. Marcus Johnson, 34, from Cwmbran in Torfaen, bought his first car, a Suzuki Swift, in 2017. However, he said he was not told that the car dealer was receiving a 25% commission, which was added to the amount he had to repay. "I signed some documents and drove off with the car," he told the BBC in November. His case was part of a landmark case with two other claimants, where the Court of Appeal ruled that finance companies should return hidden commissions, plus interest, to Mr. Johnson. He is set to receive just over £3,200 in compensation.

In 2021, the Financial Conduct Authority banned deals where dealers earned commission from lenders based on the interest rate charged to customers. The regulator said this created an incentive for buyers to be charged a higher rate of interest than necessary. Since January last year, the regulator has been considering whether compensation should be paid to those who had these deals before 2021. This created the prospect that banks and other lenders could have to pay out millions of pounds in compensation. In October, the Court of Appeal ruling widened the scope of who could receive compensation, potentially increasing the lenders' final bill to billions of pounds. The Financial Conduct Authority has since been asking affected customers to lodge complaints, which could mean that hundreds of thousands have already done so. The car finance industry is setting aside large sums of money for potential future claims.

A multi-billion pound fine for car loan companies could also lead to some finance firms going out of business, thus harming competitiveness in the market. Shares in the two largest car loan companies rose after details of the government intervention were made public. Lloyds Banking Group shares rose by almost 4%, while Close Brothers shares jumped by 21%.