The chancellor, Rachel Reeves, is considering overruling the supreme court over a £44bn car loan commission scandal after lobbying by some of the UK’s biggest lenders, the Guardian can reveal.
Under Treasury contingency plans being discussed for the event that justices decide to uphold the entirety of last October’s shock appeal court ruling that customers may be entitled to billions in compensation, the government would retrospectively change the law to cut liabilities for lenders.
Officials have been discussing the feasibility of superseding the supreme court’s decision – which is due to be delivered on 1 August – with the Ministry of Justice and Department for Business and Trade, according to people familiar with the matter.
Such a move would represent a huge intervention by the Treasury, and comes months after Reeves controversially tried to intervene in the supreme court case back in January.
The City has been anxiously waiting to see whether justices fully uphold the appeal court decision that paying commission to brokers who arranged the motor loans, without disclosing the sum and terms of that commission to borrowers, was unlawful.
Rules on such payments are covered by common law: meaning they are set by judges through a series of court decisions, rather than by parliament. New primary legislation would give parliament the final word over the handling and disclosure of commission arrangements to borrowers.
Crucially, the Treasury is understood to be weighing whether the new laws could be retrospective, meaning they would cover old cases and contracts and therefore slash a potential £44bn compensation bill for lenders such as Lloyds, Santander, Barclays and Close Brothers.
Retrospective legislation would also ensure the scandal does not balloon beyond car loans, and potentially expose lenders to complaints over commission payments across other financial products, like appliances and furniture.
The government is considering the move after months of lobbying by the Financing & Leasing Association (FLA) – the industry body that represents car lenders – and Lloyds Banking Group, which is one of the most exposed to the scandal through its Black Horse division. Lloyds has already put aside £1.2bn for potential compensation.
While rare and controversial, the UK parliament has passed retrospective legislation on payouts in the past.
In 2013, the coalition government pushed through the Jobseekers (Back to Work Schemes) Act, in order to “protect the national economy” from a £130m payout to those whose benefits were stopped after they refused to take on unpaid work for private companies. However, in that case, the laws were pushed through to protect the public purse rather than the profits of private companies.
Discussions around the potential intervention in the car finance scandal are considered sensitive, given the government does not want to be seen as disrespecting the court process.
However, there are growing concerns that an adverse ruling that prompts a massive compensation bill could have devastating effects on the sector.
The FLA has warned it could disrupt the car finance market, resulting in some providers offering fewer or more expensive loans, while others could go bust.
The Treasury is concerned that the scandal is deterring investment, and dampening US appetite for UK company shares at a time when the City is desperate to revive the London Stock Exchange.
Close Brothers, with about 20% of its portfolio dedicated to car loans, has already put aside £165m for the scandal, cancelled dividends and announced plans to sell its asset management business to strengthen its finances. Santander UK put aside £295m in November to cover potential payouts, prompting frustrations at the top of the Spanish-owned lender.
A move to supersede the supreme court judgment would not be out of line with the Labour government’s push to change regulations to try to kickstart growth, which has already resulted in a raft of City changes and the forced resignation of the chair of the competition watchdog in January.
That month Reeves also tried to intervene in the car finance supreme court case, warning the justices to “avoid conferring a windfall” to consumers.
The Treasury argued that it should be able to provide submissions to the court given the outcome stood to cause “considerable economic harm”. Its intervention in the hearing was ultimately rejected.
Lenders have argued that last October’s appeal court ruling set a much higher bar for disclosing commission arrangements and securing customers’ consent than they previously thought necessary under rules set by the City regulator, the Financial Conduct Authority.
Concerns have also been raised that the judgment could open the door to complaints across a much wider range of loans where brokers are paid on commission.
The matter was later brought to the supreme court, leading to a three-day hearing at the start of April. The judges will release their ruling next Friday, 1 August.
Commenting on the prospective contingency plans, a Treasury spokesperson said: “We don’t comment on speculation. We want to see a balanced judgment that delivers compensation proportionate to losses that consumers have suffered and allows the motor finance sector to continue supporting millions of motorists to own vehicles. It is now appropriate to let the appeals process run its course.”
The FLA and Lloyds declined to comment.
