The City regulator has told motor finance suppliers that they must conserve cash to cope with potential compensation bills arising from its investigation into car loans that City analysts expect could reach billions of pounds.

In a letter to lenders on Friday, the Financial Conduct Authority said it would use its “regulatory tools” against firms that appear to be attempting “to avoid potential future liabilities”.

Companies have been told that they must inform the FCA immediately before taking steps “that could materially impact capital positions or any other decisions which could result in serious detriment to a consumer”.

• FCA announces investigation into historic car finance loans

The industry was sent reeling in January when the regulator said it was reviewing potentially unfair discretionary commission