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Chancellor Rachel Reeves on Monday launched a bid to protect car loan providers from multibillion-pound payouts in a landmark sales case, after the Treasury warned it could damage the reputation of Britain as a place to do business.

The Treasury has taken the unusual step of seeking permission to intervene in an upcoming Supreme Court case, amid concerns that banks and other lenders could face a compensation bill worth tens of billions of pounds.

Reeves fears the case could cause chaos in the motor finance and auto industry, making it harder for consumers to get loans. About 80 per cent of new vehicles in the UK are bought on finance.

If the Treasury is successful, it will deal a blow to consumer groups and claims management companies who have been encouraging car finance customers to submit complaints to the Financial Ombudsman.

The chancellor, who is at the World Economic Forum in Davos this week trying to boost investment in Britain, fears the huge potential payout will have a chilling effect on the banking sector, stifling growth and damaging its pro-business reputation. in the country.

It’s Santander is reconsidering its presence in the UKaccording to people familiar with the matter, because it is fighting low profits in its ringfenced business in relation to other markets. In November it set aside £295mn to cover the potential costs of mis-selling car loans.

In April the Supreme Court is due to hear an appeal brought by car loan providers challenging an October ruling from the Court of Appeal which sided with consumers who complained about “hidden” commissions on car loans.

The ruling that it was illegal for banks to pay commissions to a car dealer without the customer’s informed consent sent shockwaves through the UK banking system and triggered thousands of pounds in fines. from lenders FirstRand Bank and Close Brothers.

HSBC analysts estimate the total amount of compensation could reach £44bn, echoing the £50bn paid out by banks following the scandal over the mis-selling of payment protection insurance.

In a submission to the Supreme Court, seen by the Financial Times, the Treasury admitted the case had “the potential to cause significant economic damage and could affect the availability and cost of motor finance for consumers”.

The Treasury application said the case could “create a perception that UK regulation is uncertain”. Last week Reeves called by the regulators to push them to sweep away the rules that hinder growth.

It also argued that if liability is established, then the Treasury will seek to persuade the Supreme Court that “any remedy must be proportionate to the loss actually suffered by the consumer and avoid the imposition of a windfall”.

Treasury insiders argue that rather than side with the banks against delinquent consumers, the government wants to maintain a healthy financial sector that is vital for buying new and second-hand cars. .

“If the lenders broke the law then consumers should receive compensation commensurate with the losses they suffered,” said a Reeves ally.

“However, the chancellor is concerned that the judge is in danger of using a sledgehammer to crack the nut. That would be bad for consumers and bad for the industry. “

Judges including Lord Reed, president of the Supreme Court, and his deputy Lord Hodge are due to hear the landmark case at the start of April.

The Supreme Court, which replaced the appellate committee of the House of Lords as the UK’s highest court in 2009, allows official bodies to apply to intervene in cases it hears.

Permission is granted only if the court thinks the intervention will provide “significant assistance” to the judges hearing the case.

The Treasury’s move will be welcomed by UK lenders, with some urgency talking to the government to warn of possible chaos in the consumer credit sector. Part of the discussions centered on the possibility that the government would introduce new legislation, said a person familiar with the debates.

Lloyds chief executive Charlie Nunn was then called on the government to participate as he warned that the October court ruling raises an “investment problem” for the UK.