Treasury steps in to safeguard car loan companies’ payments

The government has intervened to prevent potentially multi-billion pound compensation payments to car loan companies because of concerns they could have a significant and potentially damaging impact on the motor finance market.

Last year, the appeals court said lenders and dealers should have clearly told customers how much commission they were earning from selling loans, and should compensate them when they didn’t.

MotoNovo and Close Brothers, Britain’s two biggest car finance companies, will appeal the decision in April, after hundreds of thousands of customers came to the financial regulator with similar complaints of not being sold car loans.

The government said that while it wants to ensure customers get the new livery, it also wants the motor sector to be able to continue “supporting millions of motorists to keep their vehicles”.

Most new cars and many second-hand cars sold in the UK are purchased with finance agreements.

Some analysts estimate that the total payout in this scandal could reach £30 billion, making it the largest compensation scheme in relation to financial products since the Payment Protection Insurance (PPI) episode.

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

It is understood the Treasury intervention could be to show Britain is still a good place to do business and is emerging as Chancellor Rachel Reeves heads to Davos, Switzerland, to speak to world leaders. Are on the economic platform.

His budgetary decisions have not boosted investor confidence in the UK economy at all Borrowing costs have increased,

Some customers have said that commission on car loans was secretly agreed upon.

Marcus Johnson, 34, of Corbran, Torfaen, bought his first car – a Suzuki Swift – in 2017.

However, he said he was not informed that a 25% commission was being paid to the car dealership, which was added to pay him back.

“I signed some documents and then got into the car and drove away,” he told the BBC in November.

It was part of a landmark case with two other claimants, where the appeal court ruled that the finance company must pay hidden commissions and interest to Mr Johnson.

He is to get just over £3,200.

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

It says that this encourages the buyer to charge higher interest rates than necessary.

The regulator has been considering since January last year whether people with these deals should be compensated before 2021.

This created the possibility of repayments totaling millions of pounds to banks and other creditors.

In October, a Court of Appeal ruling widened the scope of those who could receive compensation, potentially increasing creditors’ final bill to billions of pounds.

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

The car finance industry is setting aside large amounts of money for potential future claims.

If billions of pounds of fines are imposed on auto lenders, it may also cause some financial companies to go bankrupt, thereby weakening market competitiveness.

Share prices of the two largest auto loan companies saw a rise after details of the government intervention emerged.

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