The UK’s Supreme Court has blocked an attempt by the government to protect the country’s motor finance industry from potentially paying billions of pounds in compensation to customers.

The government intervened after the Court of Appeal ruled last October it was illegal for motor finance lenders to pay a compensation fee to the dealer without the knowledge and consent of the customer.

In the UK, many people purchase cars via a financial arrangement which involves a lender, usually a bank, a dealer or a broker who serves as the middleman, and the customer. The dealer has historically received a fee from the lender or the bank for helping sign an agreement between the buyer and the lender. That fee has been based on the interest rate the buyer is charged with.

In 2021, the UK’s FCA banned such deals, arguing that it was an incentive for the dealer to charge the customer a higher or unfair interest rate.

But, more importantly, the regulator is also considering whether customers who have been affected by such deals before 2021 should now be compensated.

Some of the UK’s major lenders have appealed against the Court’s decision. That case is in the Supreme Court now, and a decision is expected to be announced in April this year. Many in the banking sector fear that the Court could rule in favor of the customers again.

Government concerns

The question many people are asking is why the UK government, which should ideally stay out of the Court’s business, has decided to intervene and even take sides.

If the Court decides to side with the customers and ask for compensation to be paid, lenders could be forced to pay in the region of £30 billion ($37.82 billion) in compensation, according to some estimates.

The treasury said last month that UK lenders were “”supporting millions of motorists to own vehicles” and it did not want them to face a heavy compensation bill.

While accepting that affected customers should receive some sort of redress, the government has argued that any heavy fine on the banks could negatively affect the competitiveness of the UK market. But after its attempt to intervene in the case was blocked, the government has now said it respects the Court’s decision and will monitor developments closely.

These latest developments come at time when the government is desperately trying to encourage economic growth in the country, having repeatedly called on regulators to get rid of unnecessary rules that hinder growth.

The FCA has announced it has given firms until December 2025 to respond to motor finance commission complaints, saying it wants all complaints to be dealt with in an orderly, consistent and efficient way.

The government has received criticism for its attempt to intervene in the case, with critics accusing it of being more worried about the lenders’s stability than redress for affected customers.