Barclays has lost a crucial legal challenge that strengthens the position of car finance customers seeking compensation for mis-sold loans.
In a ruling with far-reaching consequences for British lenders, the High Court rejected the bank’s judicial review of a Financial Ombudsman Service (FOS) decision, potentially opening the floodgates to billions in claims.
At the heart of the case was a £1,327 compensation order issued to Barclays in January, following a complaint from Jenna Lewis. In 2018, Lewis bought a second-hand Audi for £19,133, part-funded by a £13,333 Barclays loan arranged through car dealer Arnold Clark. Lewis later argued that she had not been properly informed of the commission arrangement: the dealer had unfairly raised the interest rate to increase his own commission – an arrangement that she said was never clearly disclosed.
The Ombudsman’s findings, mirrored in a similar case against Lloyds, have helped prompt the Financial Conduct Authority (FCA) to launch a wider investigation into historical mis-selling in the sector. Discretionary commission models, where dealers profited by charging customers higher rates, were banned at the end of 2020. Before the ban, 14.6 million car loans were made under such agreements, involving £8.1 billion in commissions paid by the bank.
Although Barclays did not seek to overturn Lewis’ individual compensation, it conducted a judicial review to clarify legal interpretations of the underlying consumer credit rules. Judge Kerr dismissed the bank’s challenge “on all grounds”, a ruling that shook stock prices across the industry. Shares of Barclays fell 1.3%, while Lloyds Banking Group and Close Brothers – also involved in the wider mis-selling scandal – suffered similar declines.
A spokesperson for Barclays expressed disappointment and confirmed plans to appeal the decision. The FCA’s ongoing investigation will be crucial in determining how extensively lenders may be exposed. RBC Capital Markets estimates that the resulting compensation could be as much as £6 billion.
Market observers say much depends on the legal battle to come. In October, the Court of Appeal ruled that any secret commission, and not just discretionary arrangements, could be unfair to consumers. If the UK Supreme Court upholds this ruling next year, liability for banks could exceed even today’s dire forecasts.
For now, Barclays’ loss provides clarity on one point: As regulators and courts continue to scrutinize auto-financing deals, major lenders face an increasing challenge in managing the financial and reputational costs of past sales practices.