The City minister, Lucy Rigby, has been accused of neglecting taxpayer interests after seemingly downplaying concerns about a substantial £2bn tax loophole that could benefit large banks embroiled in the ongoing car loans scandal. This controversy centres on how banks' motor finance divisions are structured, allowing them to potentially avoid significant tax liabilities on compensation payouts.
How Banks Exploit Regulatory Gaps
At the heart of the issue is the registration status of banks' motor finance arms. These divisions are officially classified as 'non-bank entities', despite being integral parts of larger banking groups. This technical distinction places them outside the scope of 2015 rules designed to prevent banks from deducting compensation payments from their profits before calculating corporation tax.
The 2015 regulations were specifically introduced to ensure that banks cannot reduce their tax bills through compensation payouts related to corporate misconduct, regardless of the financial impact of their own wrongdoing. However, the Guardian's recent investigation revealed that this loophole could be exploited as banks begin compensating victims of the £11bn car finance scandal this year.
Political Pressure and Ministerial Response
Bobby Dean, a Liberal Democrat member of the Treasury committee, wrote to ministers calling for urgent intervention after the Office for Budget Responsibility confirmed the potential £2bn cost to taxpayers over the next two years. Dean's concerns were met with what he described as a 'complete non-answer' from the government.
In her response dated 29 December, Rigby confirmed that lenders involved in the car loans scandal would indeed fall outside the 2015 rules. She stated: 'The bank compensation restriction does not apply to companies that are not banking companies, even if they are within banking groups.'
Dean expressed frustration with the government's position, telling the Guardian: 'Once again, they have chosen to side with the industry over consumers and taxpayers, just as they have done throughout the motor finance scandal. We hear from ministers over and over again about tough economic choices, but when big banks avoid £2bn in tax through a loophole, they refuse to take action.'
Broader Implications and Industry Impact
The scandal extends beyond traditional banking institutions to include specialist lenders and the finance arms of major car manufacturers such as Honda and Ford, which are also exempt from the compensation rules due to their non-bank status. This creates a significant disparity in how different financial entities are treated regarding tax obligations on misconduct compensation.
The Financial Conduct Authority concluded its consultation on a proposed £11bn car loan compensation scheme in mid-December. This plan has faced criticism from both consumer advocacy groups and lenders, with the regulator expected to outline its next steps in February or March.
Government Stance and Future Developments
A Treasury spokesperson emphasised the importance of consumer access to motor finance, stating: 'It is vital that consumers have access to motor finance to enable them to spread the cost of a vehicle in a way that is manageable and affordable. We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms.'
Rigby concluded her letter by thanking Dean for 'making me aware of these concerns', adding that she and Chancellor Rachel Reeves wanted to see the redress issue 'resolved in a way that is efficient, orderly and provides certainty for both firms and consumers'.
The situation highlights ongoing tensions between regulatory oversight, corporate responsibility, and taxpayer protection in the financial sector, particularly as the car finance scandal continues to unfold with significant financial implications for all parties involved.
