Barclays is facing a massive car sales scandal as the court upholds the ombudsman’s decision
Barclays has lost a major legal challenge strengthening the position of financial customers seeking compensation for mis-sold loans.
In a decision that has a major impact on UK lenders, the High Court has rejected a judicial review of the bank’s decision by the Financial Ombudsman Service (FOS), potentially opening the floodgates to multi-billion pound claims.
At the heart of the case was a £1,327 compensation order awarded to Barclays in January, which stemmed from a complaint by Jenna Lewis. In 2018, Lewis bought a second-hand Audi for £19,133, partly funded by a £13,333 Barclays loan arranged by car dealer Arnold Clark. Lewis later argued that he was misinformed about the commission scheme: the broker had improperly raised the interest rate to increase his commission—an arrangement he said was not clearly disclosed.
The ombudsman’s findings, modeled on a similar case against Lloyds, prompted the Financial Conduct Authority (FCA) to launch a wide-ranging investigation into historic mis-selling across the sector. Discretionary commission models, where sellers profit by charging customers higher prices, are banned by the end of 2020. Before the ban, 14.6 million car loans were written under such agreements, which involved £ 8.1 billion in commissions paid by the bank.
Barclays, although unwilling to change the Lewis settlement, pursued a legal review to clarify the legal interpretations of the basic consumer credit rules. Mr Justice Kerr dismissed the bank’s challenge “on all grounds”, a decision that sent shockwaves through the industry. Shares in Barclays fell 1.3%, while Lloyds Banking Group and Close Brothers—also embroiled in a wider illegal trading scandal—saw similar declines.
A spokesperson for Barclays expressed disappointment and confirmed plans to appeal the decision. The FCA’s ongoing investigation will be important in determining the extent to which lenders may be exposed. RBC Capital Markets estimates that the resulting compensation could be up to £6 billion.
Market observers say much depends on the legal battles that are yet to follow. In October, the Court of Appeal ruled that any undisclosed commission, not just discretionary programs, could be unfair to consumers. If the UK Supreme Court upholds that decision next year, bank debt could rise beyond even today’s most alarming projections.
Meanwhile, the loss of Barclays gives clarity to another point: as regulators and courts continue to scrutinize car finance deals, major lenders face a growing challenge to contain financial costs and the reputation of past sales practices.
