Treasury goes in to bat for major lenders over commission case
Although she may not be popular with mortgage borrowers, given her budget’s effect on interest rates, Rachel Reeves is hoping to protect lenders by getting the UK Treasury to step in to mitigate the potential fallout from a significant mis-selling case in the car loan sector, warning that billions in compensation payouts could harm the nation’s business climate and destabilise the motor finance industry. The Chancellor has sought permission for the Treasury to intervene in an upcoming Supreme Court appeal, citing fears of economic disruption.
The case, set to be heard in April, revolves around claims that lenders failed to disclose “secret” commissions paid to brokers on car finance deals. An earlier Court of Appeal ruling deemed such practices unlawful, triggering widespread concerns about the financial burden on lenders and the potential impact on consumers' access to car loans. Currently, approximately 80% of new cars in the UK are purchased on finance, underscoring the sector's importance to the economy.
The Treasury has argued that while consumers deserve compensation for any wrongdoing, the scale of potential payouts - estimated by HSBC analysts to reach £44 billion - could jeopardise the motor finance sector and reduce the availability of affordable loans. Treasury insiders stress that the government's involvement is not about siding with lenders but ensuring proportional remedies that do not destabilise the industry.
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The Supreme Court appeal was initiated by car loan providers challenging the October ruling, which found lenders like FirstRand Bank and Close Brothers liable for failing to ensure transparency in their finance agreements. The earlier judgment exposed how brokers earned commissions based on loan terms without borrowers' informed consent. In some cases, these undisclosed commissions amounted to as much as 70% of the loan's interest, incentivising brokers to prioritise personal gain over fair terms for customers.
Last month, former regulator and NatWest chief Sir Howard Davies spoke up to criticise the FCA – laying the blame for the current lender commission ‘scandal’ turmoil firmly at the regulator’s door.
Financial institutions, including Santander and Lloyds, have raised alarms about the potential consequences. Santander, for instance, has reportedly reconsidered its UK presence due to diminishing returns on its ringfenced operations and has prepared for a hit of up to £295 million from the case. Meanwhile, Lloyds CEO Charlie Nunn has publicly called on the government to address the situation, warning of an "investability problem" for the UK. Lloyds could face liabilities of up to £2.5 billion, according to analysts.
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The Treasury's intervention comes as it seeks to reassure investors and maintain Britain’s reputation as a stable financial hub. The government has also signalled its willingness to introduce legislative measures if necessary, emphasising the need for clarity and fairness in regulatory practices.
Consumer groups and claims management companies, however, have criticised the move, arguing that it could undermine efforts to hold lenders accountable. Advocates point to findings from the Court of Appeal, which highlighted significant transparency failings by both brokers and lenders, as evidence of the industry's need for reform.
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The Financial Conduct Authority (FCA) is expected to launch broader investigations into motor finance practices in light of the controversy. Industry observers anticipate stricter regulatory requirements to prevent similar issues in the future.
As the Supreme Court prepares to hear the case, the outcome will likely have far-reaching implications for UK lenders, consumer protection laws, and the broader financial sector. Whether the Treasury’s intervention will provide the stability it aims for remains to be seen.
