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Banks’ hopes of being shielded from a multibillion-pound mis-selling scandal suffered a blow on Monday after judges prevented the UK government from supporting the industry in a looming court case.

The Treasury had taken the unusual step of seeking permission to intervene in the forthcoming Supreme Court case, warning that an adverse ruling could hurt the banking sector and stunt economic growth.

The decision by the five-member panel of judges, including Supreme Court president Lord Reed, to prevent the government from stepping in is a setback for banks facing a compensation bill running into tens of billions of pounds. Reasons were not given for the refusal.

Shares in Close Brothers, which is among the most exposed banks to car loans and said last week it expected to set aside £165mn over the potential mis-selling, fell 7 per cent on Monday.

The Supreme Court is due in April to hear an appeal brought by car loan providers challenging a ruling last year from the Court of Appeal, which sided with consumers who complained about “secret” commissions on car loans.

The judgment that it was unlawful for banks to pay a commission to a car dealer without the customer’s informed consent has sent shockwaves through the banking system.

Lloyds chief executive Charlie Nunn said in December that the UK faced an “investability problem” after the court ruling.

Lloyds, which owns the UK’s largest car finance lender Black Horse, has booked a £450mn provision to cover potential redress and legal costs. Shares in the bank fell 2.5 per cent on Monday.

HSBC analysts have estimated the total cost of compensation could reach £44bn, not far off the £50bn paid out by banks for mis-selling payment protection insurance.

While it prevented the government from stepping in, the Supreme Court has permitted the Financial Conduct Authority to intervene in the case.

The banking industry and the Treasury hope the regulator will put forward to the court many of the same points as the government had hoped to make.

The FCA said it “look[ed] forward to assisting the court”.

The Treasury said: “We respect the court’s decision to not grant our application to intervene,” adding that it would “monitor [the case] closely”.

Treasury officials said that as the UK economics ministry, it was appropriate that it sought to share its perspective on the potential impact of the Court of Appeal’s judgment with the Supreme Court, so it could be factored into its deliberations.

The Supreme Court has limited time and typically prefers to keep the number of interveners to a minimum for efficiency, and will generally refuse permission where arguments have already been made by other parties, they added.