Car finance scandal: Barclays loses challenge to overturn recompense ruling
Banks have already set aside funds to deal with future compensation
Banking giant Barclays has lost its legal challenge to overturn a ruling in a case that could have an impact on a potential motor finance consumer redress scheme from the Financial Conduct Authority (FCA).
The FCA is currently considering a compensation scheme for car finance customers, after banning so-called discretionary commission arrangements (DCAs) that incentivised brokers to increase interest rates. The regulator is looking into whether commissions brought in before the ban was introduced in 2021 should also be considered unlawful. It expects to publish its findings next year.
While the regulator considers the situation, it says several complaints have been made about DCAs that were signed prior to the ban, and some have been upheld by courts.
In the latest development, Barclays Partner Finance challenged a decision by the Financial Ombudsman Service, which ruled a customer was unfairly charged commission of just over £1,300 on a loan in 2018.
Barclays Partner Finance challenged the ruling on three different grounds, but they were all dismissed by the High Court.
The judge found the Financial Ombudsman had interpreted the FCA rules and the Consumer Credit Act 1974 correctly when it decided the lender and dealer involved had not met the relevant standards in place at the time.
According to Reuters, Barclays has said it will appeal the ruling.
“This challenge related to a single, specific case on which we disagreed with the Financial Ombudsman Service’s decision,” a Barclays spokesperson told the news service. “We are disappointed in the court’s ruling and will be appealing.”
Despite the appeal process, the ruling is significant for other customers who may have unwittingly paid DCAs before 2021. The FCA has already confirmed court rulings will impact its decision regarding DCAs made before its ban came into force.
“I hope [customers] think carefully about whether you feel you were wronged and lost out, and only [lodge a complaint] if you do.”
Martin Lewis, Money Saving Expert
The FCA will also consider the outcome of three more cases due to be heard by the Supreme Court, which makes rulings that cannot be appealed, when it publishes its review.
“We welcome the additional clarity this judgment brings to consumer complaints involving DCAs. The High Court judgment and the Supreme Court hearing deal with important questions of law highly relevant to our review,” the FCA said in a statement. “We plan to set out next steps in our DCA review in May 2025.”
There has been talk of the DCA compensation becoming the “new PPI” for customers, with claims companies set to pounce on any FCA ruling and lenders setting aside millions to deal with complaints. According to Reuters, Lloyds has already set aside £450 million to cover possible costs, while the UK arm of Spanish bank Santander has set aside £295 million.
But while claim companies and individuals may be rubbing their hands at the prospect of payouts from big banks, the situation has sent shockwaves through the UK economy. Some banks’ stock prices have taken a hit as a result of the uncertainty, and Lloyds’ CEO has said the situation is creating an “investability problem” for the UK. A major redress scheme could also make it harder for consumers to borrow in future, with the potential for lenders to reduce lending or increase interest rates — or both.
On his Money Saving Expert website, financial campaigning journalist Martin Lewis said: “The wider Court of Appeal decision sets new strong standards for car finance commissions going forward. Yet on mulling it, even I find it difficult to believe that retrospective redress is due from car finance firms with fixed commissions, as they were following regulator’s guidelines.
“If not, and we were to move to a hypothetical model of car finance reclaim where ‘any commission if amount wasn’t known’ was unfair and should be repaid, it may risk being counterproductive to consumers as it’s a potentially existential threat to consumer lending — which could mean both less availability and higher costs in future. I hope [customers] think carefully about whether you feel you were wronged and lost out, and only [lodge a complaint] if you do.”
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