Reeves poised to step in on Supreme Court car loans commission case

Chancellor Rachel Reeves may introduce legislation to limit payouts if the Supreme Court rules against lenders in the UK’s £44 billion car finance comissions case.

The Supreme Court is due to give its judgement on car loans commission cases tomorrow afternoon at 4.35pm.

The saga threatens to re-write the historic relationships and responsibilities between motor finance houses, brokers and dealerships, and the car buyer signing up for finance.

As reported by The Guardian, the Chancellor may override the court's judgment if it upholds a previous ruling that found finance companies and dealers failed to disclose commission arrangements to consumers, leaving them potentially liable for a large-scale redress scheme.

The rules around comission disclosure had been defined by the Financial Conduct Authority in its rulebook, until last year's Court of Appeal ruling deemed the issue is covered by common law, which means they are set by judges, rather than by parliament.

However, Reeves could put new legislation in place that would give parliament the final word over how this is all handled, even retrospectivley, which means this new legislation would cover old cases and contracts.

The idea being that stepping in would reduce the potential £44bn compensation bill for lenders and help to settle the financial markets.

Even if the Government does step in, it will take more time for ministers to put new legislation through, so there will be no quick fixes or answers likely immediately after tomorrow's ruling.

The case centres on historic discretionary commission arrangements used in personal contract purchase (PCP) and hire purchase deals.

These arrangements allowed brokers or dealers to set customer interest rates, with higher rates resulting in higher commissions. The Court of Appeal ruled last year that this practice breached a duty of transparency.

The UK Supreme Court heard appeals from Close Brothers and FirstRand in April. If the appeal fails, millions of consumers could become eligible for compensation.

The Financial Conduct Authority (FCA) has said it will consult on a potential redress scheme following the judgment.

Lenders including Lloyds, Close Brothers and Ford Credit have already set aside provisions in anticipation of possible claims.

Lloyds Banking Group has put aside more than £1 billion, while Close Brothers has provisioned £165 million. Ford Credit has allocated £61 million.

Exposing the financial system to further strain, the FCA warned that mass compensation payouts could create instability in capital markets.

Avoiding another PPI scandal

Some within Government believe legislative intervention may be necessary to avoid a scenario comparable to the PPI scandal, which cost lenders over £38bn.

The Supreme Court rejected an attempt by the Chancellor to formally intervene in the case earlier this year.

Reeves’ intervention came after pressure from motor finance providers, who argued that massive compensation payouts could destabilise the sector, leading to reduced loan availability or higher interest rates.

The Chancellor, however, denied accusations at the time of yielding to financial industry lobbying or acting against consumer interests.

Reeves told an audience at the World Economic Forum in Davos, Switzerland earlier this year: "There is nothing pro-consumer about making it harder for people to buy an affordable car for their family.

"That would be bad for working families."