Rachel Reeves is considering overruling the Supreme Court if judges side with consumers over the £44bn car finance scandal.

Under plans being considered by the Chancellor, the Government could retrospectively alter the law to reduce the liabilities paid by lenders if the Supreme Court upholds a decision made by the Court of Appeal last October.

Britain’s biggest banks could be forced to pay out £44bn in compensation to drivers after customers said they were unlawfully sold car loans.

The Treasury is debating if new laws could be applied retrospectively to the case, allowing them to cover old contracts and cases, The Guardian reported. Such a move would cut the multibillion-pound bill facing lenders including Close Brothers, Barclays, Santander and Lloyds.

Retrospective legislation would also ensure the scandal does not balloon beyond car loans, and potentially expose lenders to complaints over commission payments across other financial products such as loans for household appliances and furniture.

Government sources refused to rule out such an intervention from Ms Reeves. The Supreme Court is due to announce its long-awaited ruling on Friday Aug 1.

It comes after the Supreme Court in February stopped an attempt by the Chancellor to block payouts to drivers. The Treasury argued the scandal threatened to undermine the UK economy and deter investment, saying payouts must be limited.

The regulations which govern these payments come under common law. Therefore, they are set by judges using court decisions, rather than by Parliament. New legislation would allow Parliament to have the final say on the handling and disclosure of commission arrangements handed to borrowers.

Although passing retrospective legislation on compensation in the UK is uncommon and controversial, it is not unprecedented.

In 2013, the Parliament passed the Jobseekers (Back to Work Schemes) Act, to prevent £130m in compensation payments being made to people who had their benefits stopped following their refusal to work for private companies.

Several lenders have set aside significant sums to cover potential compensation costs, including Lloyds Banking Group, which has reserved £1.2bn, Santander UK is designating £295m to cover the costs in compensation and Close Brothers has put aside £165m.

The Treasury was contacted for comment.

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