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Consumers risk missing out on up to £10bn of compensation after Rachel Reeves intervened in the motor finance scandal.
Analysts said that the amount of money handed to people who were allegedly mis-sold car loans is likely to be significantly lower than previously expected after the Chancellor intervened in a High Court case on behalf of big banks.
On Wednesday, estimates of the likely compensation bill for lender Close Brothers were cut by one third from £450m to £300m by stockbroker Shore Capital because of the improved “mood music” around the issue from the Government.
If this is replicated across the industry, it would mean a reduction of as much as £10bn in overall payouts that had been expected to hit £30bn.
The Chancellor, who has made protecting the banks a key part of her growth agenda, has stepped in to back lenders in a landmark Supreme Court ruling on whether compensation is owed to drivers.
Her unusual intervention has triggered hopes that courts will be lenient, resulting in a lower bill for banks.
The reduction came after Close Brothers, one of Britain’s largest motor financiers, booked a £165m provision to cover the costs of the car finance investigation, lower than many expected.
Gary Greenwood, of Shore Capital, said: “Directionally it feels like (the redress bill) should be down.
“Given how concerned the Treasury has been about the issue and that’s a material down rather than a minor down. The sort of PPI-like bonanza free-for-all has ended.”
However, he said the expected compensation bill “won’t land equally” with different lenders – meaning some banks will be forced to pay more than others.
Benjamin Toms, of RBC Capital, also said he was leaning more towards his initial estimate of a bill of around £17.8bn for the industry instead of the “downside” scenario of £32.7bn.
He said: “Whatever the outcome, the regulator will need to opine on next steps including potentially a compensation scheme. Recent news flow suggests that the Government is placing pressure on the regulator to design that scheme in a way which is as favourable as possible for the banks.”
The Supreme Court is due to hear the car finance mis-selling case in April when judges will decide whether customers were mis-sold loans because they were not told about “hidden commissions”.
Banks and specialist lenders paid commissions to car dealers. Some of these, known as discretionary commission arrangements (DCAs), were based on the interest rate selected for borrowers by car dealers.
DCAs were banned by the Financial Conduct Authority four years ago but a ruling by the Financial Ombudsman Service last year paved the way for historic claims dating back to 2007.