Barclays Challenges Financial Ombudsman’s Ruling in Motor Finance Case

Barclays Partner Finance on Tuesday (15 October 2024) sought the High Court’s ruling to overturn the Financial Ombudsman Service’s January decision in favour of the complainant in a motor finance discretionary commission arrangements case.

Earlier this year, the Ombudsman ruled that a Barclays customer had been unfairly charged a commission on a motor finance deal made in 2018. Specifically, the customer was charged a discretionary commission of £1,326.60, which represented 43% of the total loan cost.

Barclays has paid the compensation to the customer, the finance company’s lawyer Ben Jaffrey said, further stating that the company does not intend to recover that money even if it wins its challenge to the FOS decision.

The parties “are not really here for a dispute about 1,300 pounds,” Jaffey told the court, according to a Reuters’ report. He explained that the outcome of this case is “likely to be viewed” as an example or template for other cases, which will have an impact on other related complaints to individual lenders and the Ombudsman. It could affect the planned redress scheme of the Financial Conduct Authority, as well.

The FCA is an interested party to the Barclays’ motor finance commission case, emphasising the case’s significance to the financial watchdog’s current investigation into the historical implementation of discretionary commission arrangements in the motor finance sector.

The High Court’s decision in the Barclays’ case "will inform the FCA's ongoing work,” lawyer Jemima Stratford, representing the FCA, said in court filings.

FCA’s Work

As part of its statutory objectives to protect consumers and maintain healthy competition in the market, the FCA has been looking into how discretionary commission arrangements affect motor finance deals and whether or not customers are adversely affected.

In March 2019, the financial watchdog published its final report where it discovered the widespread use of commission models where car finance brokers are encouraged to gain commission by increasing the interest rates that customers have to pay. The broad discretion for brokers to increase the rates has caused customers to overpay on their motor finance in many cases.

In July 2020, after a three-month open consultation, the FCA confirmed its ban on motor finance discretionary commission, effective January 2021. The Authority also mandated the lenders to review their practices and to resolve any known harm incurred by their customers.

In January 2024, the FCA announced that it will investigate historical applications of the commission models in motor finance deals made between April 2007 and January 2021. This initiative was prompted by the high number of complaints made by customers to their motor finance companies, many of which were escalated to the Ombudsman.

At the same time, the FCA also implemented a temporary hold until 25 September 2024 on the eight-week deadline for motor finance companies to send their final response to customers’ commission-related complaints. This will ensure that inconsistencies and inefficiencies in handling customers’ DCA-related complaints as well as market disruptions are avoided while the Authority is assessing the issue.

In September, after a month-long open consultation, the FCA extended the pause to December 2025, citing delays in gathering the necessary data from firms. The Authority also highlighted that the outcome in the Barclays’ judicial review proceedings and other pending motor finance cases in the Court of Appeal may be relevant for it to determine its next steps in its work on the motor finance sector.

The Barclays PF vs Miss L Case

The Financial Ombudsman’s decision in the Barclays PF vs Miss L case was one of the two landmark rulings released on 10 January 2024 that provided hope for millions of car buyers who are stuck with unfair or mis-sold car finance deals due to discretionary commission arrangements (DCAs).

In this case, the Ombudsman found that Miss L, whose real name was not mentioned in documents, bought a used car in November 2018 through a conditional sale deal which could have cost her 2.68% in interest, but she was paying 4.67% interest instead.

The complaint alleged that Clydesdale Financial Services Limited (trading as Barclays Partner Finance) acted unfairly by paying Ms. L’s credit broker the commission without her knowledge. The commission was linked to the interest rate of the motor finance deal, with the Broker having the discretion to adjust the rates to influence the amount of commission to be received.

Barclays contested that it complied with regulatory and legal obligations at that time.

Ombudsman Jeshen Narayanan ruled in favour of Ms L and directed Barclays to pay her compensation for the following:

• The difference between her payments at 4.67% interest rate and her supposedly payments at 2.68%; together with
• The interest of overpayments Ms L made at the rate of 8%; and
• If the finance deal has not ended, a reduction of monthly payments left on the deal.

On 8 April 2024, three days before the deadline to appeal, Barclays launched a judicial review of the Ombudsman’s ruling made against them.

Industry Reactions

The landmark ruling of the Financial Ombudsman in Ms L’s DCA-related motor finance complaint against Barclays may have opened the doors for millions of related car finance claims and complaints filed against lenders and escalated to the Ombudsman. But with Barclays now challenging the decision, the outcome of those pending complaints remain uncertain.

In fact, there has not been a successful case from either the motor finance companies or the FOS after the landmark ruling.

The FOS has been “trawling through old cases at a glacial speed,” noted Coby Benson, Solicitor at Bott and Co, further stating that the lenders are “still disputing” any rulings in favour of the customers.

Benson further highlighted that Barclays sought the judicial review at “the eleventh hour” just a few days before the deadline to appeal. He further said that this is “just another example” of lenders doing “everything possible to frustrate the complaints process and delay things further.”

The FCA acknowledges that the motor finance market serves at least 2 million consumers every year, and it is part of its legal obligation to ensure that customers are appropriately compensated while maintaining effective, healthy competition in the market for the consumers.

Industry analysts estimated that the car finance lenders will be in a range from £13 billion to £16 billion in compensation payouts when the FCA announced its investigation into the historic commission deals made between 2007 and 2021. These estimates represent at least double the amount predicted before the FCA’s announcement.

Barclays, which has been in the motor finance market from 2010 to 2019, is expected to face as much as £250 million, according to analysts at RBC.

Merchant banking group Close Brothers, which is seen to be the company with the largest relative impact related to FCA’s probe, is expected to face almost £200 million in compensation payments. In response to the watchdog’s announcement, the Group scrapped dividend payouts earlier this year, and carried out its £400mn capital plan including the sale agreement of its wealth management unit.

Analysts predict that Black Horse’s parent company, Lloyds Banking Group, will be facing potential compensation costs ranging from £1.8 billion to £2 billion. In its full-year 2023 report made in February, however, the Group reserved £450 million for this matter based on its assessment of various scenarios. The amount was removed from its remediation costs in the next quarterly report.

Meanwhile, analysts forecast around £850 million compensation costs for Santander UK.