Reeves risks disaster if she meddles in the motor finance scandal

Telegraph

25-07-2025

She has driven out the non-doms. She has hammered the farmers. And pubs and restaurants are being throttled with higher employment taxes and rates. Still, it is good to know that the Chancellor, Rachel Reeves, has finally found one group of businesses she would actually like to help: the car finance giants.
The Treasury is reported to be looking at overruling the Supreme Court on a potential £44bn of compensation for mis-selling finance schemes. Seriously? In reality, that would fatally undermine consumer protection. And it is hard to think of a less deserving case for help than the auto finance industry.
The car finance scandal has been rumbling on for several years now. It is a complex saga, stretching back many years. The nub of it, however, is this. Lenders were paying commissions to middlemen and dealers based on the interest rate that could be imposed on customers, and those commissions were not always disclosed.
Back in 2021, the Financial Conduct Authority quite rightly banned that practice, but there are now claims for compensation for past deals. Last year, the Court of Appeal supported those claims, and the Supreme Court is poised to deliver its final verdict next Friday.
A lot of money is at stake, with estimates of the total amount that could be paid out in compensation running between £30bn and £44bn, and with firms such as Santander, Lloyds, Barclays and Close Brothers likely to take the biggest hit.
We will have to see what the Supreme Court decides when it delivers its judgment. But even if the Court does rule against the banks, they may have an unlikely saviour at hand. It is none other than the Chancellor.
She has already tried to intervene in the litigation once, controversially arguing back in January that the courts should not deliver a windfall for consumers, and any compensation should be 'proportionate to any harm done'. Now there are reports that the Treasury may well go a whole step further and support retrospective legislation to limit the damage that could be done to the City.
We can all see what Reeves is worrying about. The sums at stake are enormous. Close Brothers has already set aside £165m to deal with the potential claims against it, while Lloyds has put aside £1.2bn, and some of the other banks may face similar bills.
If the mortgage mis-selling scandal from a decade ago is any guide, the final total could be two or three times the initial estimates, and while that would be a bonanza for the lawyers – and there are a lot of hucksters among them who hardly need any encouragement – and for the lucky few who collect a few thousand on a Ford or Nissan they bought on finance fifteen years ago, it could prove catastrophic at a time when the government is desperately trying to revive the City, and kick-start investment and growth.
It will make the UK look even more off-limits to the global finance industry than it already is. 'I think having a vibrant car industry and motor finance industry in the UK is important,' argued Reeves when she first started meddling in the case back in January.
The trouble is, this is absolutely the worst place to start interfering with the legal process. Here's why. First, the car finance industry might well be fiercely lobbying the Treasury, but the blunt truth is that it is hardly deserving of any help.
As most of us will know from personal experience of buying a car, navigating the bewildering special deals, discounts, small print, and all the other shenanigans of the motor trade can be a complete nightmare. You generally come away with the feeling that you have been ripped off, and that is because you probably have been.
A £30bn to £40bn bill for compensation might finally force the industry to clean up its act, and start offering far more straightforward deals that people can understand and take or leave as they feel is appropriate. It has worked, at least to some degree, in mortgages, and it can work in finance as well.
Next, this is hardly a matter for the Treasury. The claims are being brought under the common law, not a specific act of parliament, and ministers interfere with that at their peril. In reality, we need to respect the common law, as it is fundamental to the rights we all enjoy as citizens of a free country.
Just as seriously, we should be strengthening consumer protection, not undermining it just because it is an inconvenience for some big banks. If Reeves concedes on this issue, then the lobbyists will just be back asking for all kinds of exemptions from legal decisions.
Finally, there are far better ways of helping the City than this. The Chancellor could rule out another windfall tax on banks; she could scrap stamp duty on share trading; she could increase the annual Isa limit; she could reduce the rate of Capital Gains Tax for investment in British companies; she could offer tax breaks for the booming market in crypto trading; or she could offer any one of a dozen different initiatives that would give finance a boost. Any of them would be far more useful than interfering with car finance claims.
It seems extraordinary that a Government that is often far too deferential to lawyers and upholds every bizarre judgment handed down by one of the international courts should be looking to overturn a common law decision by British judges, which, as far as anyone can see, appears perfectly reasonable and will help ordinary consumers. It will set a terrible example.