Barclays slammed by crucial court case loss – shares plummet

Lloyds, others' shares also fall as judge rejects case "on all grounds"

Barclays slammed by crucial court case loss – shares plummet

Last month, former regulator and NatWest chief Sir Howard Davies spoke up to criticise the FCA – laying the blame for the current lender commission ‘scandal’ turmoil firmly at the regulator’s door.  

“I’m disappointed there has not been enough regulatory clarity on the rulebook that has meant the court has been able to step in with its own interpretation,” he said. “My general experience is that if the regulator is very clear about the expectations on firms, then the courts are usually very reluctant to substitute their judgment for that of the regulator within a statutory context.” 

But the courts are now heavily involved, and, in a blow for the mortgage lender, Barclays has failed in its attempt to overturn a financial ombudsman ruling, paving the way for potentially billions of pounds in compensation claims tied to mis-sold car loans. 

Read more: Lloyds, Santander, Barclays and others could face ratings downgrade 

The Financial Ombudsman Service had ordered the bank, in January, to pay £1,327 to Jenna Lewis, a customer who alleged she was mis-sold a car loan. Lewis purchased a second-hand Audi from Arnold Clark in November 2018 for £19,133, financed in part by a £13,333 loan from Barclays. 

The ombudsman found Barclays liable because the dealership had unfairly increased the loan's interest rate to earn a higher commission, a detail that was not disclosed to Lewis when she signed the deal. She raised her complaint in 2021, three years after buying the vehicle. 

Barclays sought a judicial review at the High Court, not to challenge the compensation payout itself but to contest what it claimed were legal misinterpretations by the ombudsman. However, Mr. Justice Kerr rejected the bank's arguments “on all grounds”. 

Read more: Santander's commission concerns hit profits as FCA warns of flood of cases 

Shares in Barclays plummeted 1.3% following the court’s decision, while other financial institutions implicated in the car finance mis-selling scandal also experienced declines, with Lloyds Banking Group and Close Brothers seeing share prices fall by 1.6% and 1.3%, respectively. 

A Barclays spokesperson commented: “This challenge related to a single, specific case on which we disagreed with the Financial Ombudsman Service’s decision. We are disappointed in the court’s ruling and will be appealing.” 

The Financial Conduct Authority (FCA) is currently investigating the issue of discretionary commission arrangements, a practice in which car dealers could set higher interest rates on loans to increase their commission payments. This model was widely used until it was banned in 2021. Between 2007 and 2020, approximately 14.6 million car loans were arranged under this scheme, with £8.1 billion paid out in commission. 

Read more: Lloyds Bank gets praise after being accused of flooding law firm with letters 

The FCA’s ongoing probe aims to determine whether borrowers were properly informed about how these commission structures worked and how they affected loan costs, as required by consumer credit regulations. The FCA is expected to announce its next steps in May. 

In Lewis’s case, Arnold Clark disclosed only that “lenders typically pay us a fee” for introducing customers, omitting crucial details about the inflated interest rate. Lewis was charged 4.67% interest on her loan, though Barclays would have lent to her at just 2.68%. This discrepancy resulted in an extra £1,327 in interest costs over her five-year finance deal—money that was pocketed by the dealership as commission and later refunded to her. 

RBC Capital Markets estimates that compensation linked to this type of mis-selling could cost banks as much as £6 billion. 

Tuesday’s ruling is separate from an October Court of Appeal decision that found any undisclosed commission payments to car dealers were inherently unfair to consumers. If upheld, this precedent could significantly expand the scope of mis-selling claims beyond discretionary commission practices, exposing banks to even greater liabilities. 

MotoNovo, owned by South Africa’s FirstRand, and Close Brothers have appealed that decision, and the UK Supreme Court is set to hear their case next year. 

What’s all the fuss about? 

The car finance mis-selling scandal in the UK revolves around the practices of car dealerships and lenders in setting interest rates for car loans, often to the detriment of consumers. The scandal primarily concerns "discretionary commission" arrangements, a model that was widely used in the car finance industry until the Financial Conduct Authority (FCA) banned it in January 2021. 

What is the issue? 

Under discretionary commission agreements, car dealers had the ability to influence the interest rate on car loans provided by lenders. The higher the interest rate charged to the borrower, the larger the commission the dealer would earn from the lender. This incentivised some dealers to inflate interest rates without fully disclosing these arrangements to customers, leaving borrowers paying more for their loans than necessary. 

This practice is now being challenged as a violation of consumer credit rules, which require lenders and dealers to clearly explain the terms of loans, including any factors that may affect the cost. The lack of transparency has led to accusations of mis-selling, as many customers were unaware that their interest rates were being manipulated to generate commissions for dealers. 

Timeline of events 

  1. Historical use (2007-2020): Approximately 14.6 million car loans were arranged under this model between 2007 and 2020. During this period, an estimated £8.1 billion was paid in commissions to dealers. 

  2. FCA ban (2021): The FCA banned discretionary commission arrangements starting in January 2021, citing concerns about unfair practices and inflated costs for borrowers. It mandated that any commission structure should be disclosed clearly to consumers. 

  3. Complaints and legal action: In recent years, customers began raising complaints about undisclosed commission arrangements, arguing they had been overcharged due to these practices. The Financial Ombudsman Service has upheld many of these complaints, ordering lenders to compensate affected customers. 

  4. Barclays and Lloyds cases: Notable cases include rulings against Barclays and Lloyds, where the Financial Ombudsman ordered compensation for customers who were charged higher interest rates due to undisclosed commissions. According to the court’s findings, the borrowers—many of whom were students, workers, and first-time car buyers—placed their trust in brokers to act in their best interests. Instead, brokers prioritised their own earnings by pushing finance deals that came with hidden commissions, which could make up a large portion of the total credit cost. In one example, a customer ended up with an inflated loan rate, unaware that almost 70% of the interest paid went to the broker. The court also pointed out that small-print disclosures by lenders about potential commissions were insufficient to make customers aware of these hidden fees. It determined that both FirstRand and Close Brothers had failed in their duty to ensure transparency in the agreements, setting a concerning precedent for the industry on commission payments. “This is about trust and fairness,” stated the judges. “The consumers were very poorly served by the brokers and the lenders alike.” 

  5. FCA investigation (2023): The FCA is now conducting an investigation to determine the full extent of historical mis-selling. It is examining whether lenders and dealers properly disclosed commission structures to borrowers, as required under consumer protection laws. 

Impact on borrowers 

Borrowers affected by these practices often paid thousands of pounds more in interest than they would have if the loans had been fairly priced. For example, a borrower might have been charged an interest rate of 4.67% when the lender’s base rate was only 2.68%, with the difference going to the dealer as commission. 

The FCA’s investigation is expected to clarify whether additional compensation is owed to affected consumers. If systemic issues are found, banks and lenders could face billions of pounds in compensation claims. Estimates suggest the cost of these claims could reach £6 billion. 

Legal precedents 

The Court of Appeal ruled in October 2023 that any undisclosed commission, even outside of discretionary agreements, could be deemed unfair to consumers. This precedent, if upheld by the UK Supreme Court, could significantly expand the scope of claims beyond discretionary commission cases, increasing potential liabilities for lenders. 

What’s next? 

  • The FCA is expected to announce further findings and next steps in its investigation by May 2024. 

  • The UK Supreme Court is set to hear appeals from lenders like MotoNovo and Close Brothers in 2024, which could establish critical legal precedents. 

  • As the FCA’s investigation continues, consumers are encouraged to review their car finance agreements and raise complaints if they believe they were misled.