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Forcing banks to pay drivers billions of pounds in compensation for mis-sold car finance would be “bad for working families”, Rachel Reeves has said.
The Chancellor said a potential £30bn bill for the scandal would raise the cost of borrowing and ultimately hurt consumers.
Speaking to reporters at the World Economic Forum in Switzerland, Ms Reeves said: “There’s nothing pro-consumer about making it harder for people to buy an affordable car for their family, that would be bad for working families.”
It comes after the Chancellor launched a rare intervention in a Supreme Court hearing on the issues earlier this week.
In an application to intervene in the case to prevent, seen by The Telegraph, the Treasury said a Supreme Court ruling against the banks could “adversely affect the United Kingdom’s reputation as a place to do business, with a consequent impact upon economic growth”.
On Wednesday, Ms Reeves stressed that any compensation should be “proportionate”.
She said: “We need to get the balance right. Having a vibrant car industry and motor finance industry in the UK is important and that conversation needs to be proportionate to any harm done.”
The car finance scandal dates back to 2021, when the Financial Conduct Authority (FCA) banned dealers from receiving commission from a lender based on the interest rate charged to the customer. The watchdog was concerned that the system pushed salesmen to offer car loans with higher interest rates, leading to bad deals for customers.
In 2024, the FCA began considering whether compensation should be paid to people who took out these deals. A decision at the Court of Appeal late last year broadened the scope of payments. Some analysts estimate that the total compensation bill could reach as high as £30bn, which would make it the most costly scandal for high street lenders since the payment protection insurance (PPI) saga.
Lloyds is considered to be the most exposed lender, with Santander also facing a big hit. Ms Reeves met Ana Botin, the chairman of Santander, on Wednesday days after it emerged the Spanish bank was reviewing its UK operations amid concerns that it was being stifled by red tape.
The Chancellor is using a two-day visit to Davos to meet bankers, tech giants and other chief executives in an effort to drum up investment in Britain.
It comes less than three months after she launched the biggest tax raid in history, triggering a significant backlash from businesses.
In recent days the Chancellor has sought to rebuild bridges with the private sector by proposing a bonfire of red tape. Ms Reeves is expected to set out more detailed plans for growth next week in a speech in which she is expected to back a third runway at Heathrow, among other ideas.