Rachel Reeves suffers setback in attempt to intervene with car finance scandal amid compensation fears

But before the payouts could begin, Reeves sought to block the payments citing the unprecedented costs it would have on the UK banking sector.

While the rejection would deal a significant blow to banks, it has been considered a huge victory to hundreds of thousands of drivers who may be eligible for compensation over mis-sold car loans.

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The case, which is set to be heard in April, will determine whether car finance companies had a duty to inform customers about bonuses and commissions they received from finance deals.

It stems from a Court of Appeal ruling that found it unlawful for lenders to pay commission to dealers without customer consent. Industry experts estimate banks and finance firms could be forced to pay out as much as £38billion in compensation.

Reeves's original intervention came from the fact that the vast majority of new cars, and many second-hand ones, are purchased with finance agreements with the payouts set to have a disproportionate impact on the sector.

The Financial Conduct Authority banned such commission arrangements in 2021, after finding it incentivised dealers to charge customers higher interest rates.

Since January, the FCA has been considering whether compensation should be paid to people who had these deals before the 2021 ban expanding the scope of payouts significantly. Some analysts compare the potential scale of payouts to the PPI scandal.

The Treasury had expressed concerns that the size of compensation payouts could undermine the competitiveness of UK banks.

In its application to intervene, the Treasury warned the case could "adversely affect the United Kingdom's reputation as a place to do business, with a consequent impact upon economic growth".

Lloyds Bank CEO Charlie Nunn warned in December: "Investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation which is then having a significant retrospective look back is bleeding across the whole economy."

On top of rejecting the Treasury intervention, the Supreme Court also denied applications from Consumer Voice and the Finance and Leasing Association.However, it approved applications from the FCA and the National Franchised Dealers Association.

Sue Robinson, chief executive of the NFDA added: "We have secured the services of Caytons, A Gallagher Bassett Company, Jonathan Kirk KC and Richard Roberts (both from Gough Square Chambers) to represent NFDA in those proceedings, which are listed for hearing between April 1-3, 2025.

"NFDA, as the representative of the consumer-facing part of the sector, understands the needs of UK consumers. We look forward to the next phase of the case and will continue to monitor developments closely, keep members updated, and encourage members to reach out with any queries."

The FCA has set a deadline of the end of 2025 to resolve all cases related to the car finance scandal. After the court's conclusion, the FCA will consider whether compensation should be paid and what form it might take.

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A Treasury spokesperson told The Telegraph: "We respect the Court's decision to not grant our application to intervene... and will monitor it closely".