Treasury “to intervene” in Supreme Court case

Growing concern about the potential impact of any mis-selling compensation scheme on lending in the auto finance market has promoted the government to take action, with reports the Treasury has written to the Supreme Court seeking permission to intervene in April’s appeal hearing of the Court of Appeal decision regarding undisclosed commission payments.

According to the Financial Times, Chancellor Rachel Reeves has authorised the request amid fears that possible multibillion-pound payouts could cause further chaos, following the market turmoil resulting from October’s judgment in Wrench vs FirstRand which saw some lenders temporarily halt operations.

The Treasury’s letter emphasises the need for a proportional response to any compensation regime, claiming the Supreme Court case has “potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers”. It also cites concerns the case might “generate a perception that regulation in the UK is uncertain”.

The letter states that if liability was established, then the Treasury would seek to persuade the Supreme Court that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall”.

Shares in Lloyds Banking Group, which has exposure via its Black Horse subsidiary, and major auto finance lender Close Brothers rose more than 5% and 15% respectively following the media reports.

Compensation costs

The uncertainty around the legal challenges to commission payments has already had a significant impact on lenders.  Close Brothers saw its value drop from £1.5 billion to just £325 million last year.

Meanwhile, Lloyds said it had set aside £450 million to meet potential compensation claims, while Santander UK has allocated £295 million amid speculation that the unresolved liability is one of the reasons the Spanish bank is contemplating quitting its UK retail business.

Estimates of the likely total bill for lenders vary widely, particularly since October’s Court of Appeal finding widened the field for possible complaints to include any undisclosed commission payment, or payment for which informed consent was not obtained, rather than the narrower issue of discretionary commission arrangements (DCAs) which are the focus on the ongoing Financial Conduct Authority (FCA) review.

Moody’s has suggested a figure of up to £30 billion, while last autumn the Bank of England’s “crude but prudent” estimate indicated auto finance lenders could face a total bill of some £25 billion. More recently HSBC analysts have calculated the bill could hit £44 billion.  See this AFC article for analysis from BDO of how the bill could add up.

The Supreme Court case is listed for a three-day hearing, starting on 1 April. The UK’s highest court, it allows official bodies to apply to intervene in cases it hears, if it believes this will offer “significant assistance” to the judges hearing the case. So far, the FCA, Black Horse and UK Finance are listed as interveners.

“It is to be hoped that common-sense prevails, and the Supreme Court provides clarity and certainty on requirements,” he added.