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Barclays has said it plans to appeal after losing a court case over car loan commissions that threatens to open the door to billions of pounds of compensation claims against British banks.
Shares in Barclays fell 1 per cent on Tuesday morning after the High Court dismissed the bank’s challenge against a Financial Ombudsman Service ruling that found it had unfairly added a £1,300 commission to the cost of a car loan in 2018.
“This challenge related to a single, specific case on which we disagreed with the Financial Ombudsman Service’s decision,” Barclays said. “We are disappointed in the court’s ruling and will be appealing.”
The court decision is a further blow for UK banks, which analysts at Moody’s rating agency have estimated could have to pay as much as £30bn of redress to car loan customers. That would make the issue comparable in size to the payment protection insurance scandal that weighed on the sector’s profits for much of the past decade.
The legal battle hinges on the question of whether banks were treating consumers fairly and acting within the rules by paying “discretionary” commissions to dealerships, which meant they could earn more by charging some customers a higher interest rate without fully disclosing it.
High Court judge Timothy Kerr upheld the ombudsman’s decision that Barclays, through its Clydesdale unit, had created “an unfair treatment” by paying a higher commission to a car dealership if it arranged a loan with a higher rate. The court found this commission was “unusual and indicative of an acute conflict of interest not adequately flagged up”.
The decision comes only a week after the Supreme Court said it would review a ruling earlier this year by the Court of Appeal, which said consumers should be paid compensation by banks over car loan commissions that were only partly disclosed or not at all, whether or not they were “discretionary”.
This widened the potential costs for the banking sector of the car loan controversy, which has already prompted a flood of complaints to lenders. By appealing against the ruling, Barclays may be playing for time in the hope that the Supreme Court rules in the industry’s favour.
Close Brothers, Lloyds Banking Group and Santander UK are among the most exposed lenders, and shares in all three dipped following the ruling against Barclays.
The Barclays case concerns the 2018 purchase of an Audi for almost £19,000 by a “Ms Lewis” at an Arnold Clark dealership in Liverpool. The dealership had the option to increase the interest rate on financing from Clydesdale from 2.68 per cent to as much as 15.25 per cent.
The dealership put Lewis on a rate of 4.67 per cent, earning it an extra commission from the bank of £1,326.60, which the High Court said was disclosed only in “threadbare statements” in the loan agreement. It upheld the FOS decision to order the bank to repay the higher borrowing costs the commission caused for Lewis plus an extra 8 per cent a year.
RBC Capital Markets analyst Benjamin Toms predicted in a note on Monday that such a decision would affect the share price of other banks with exposure to motor finance but cautioned that it would be “the wrong reaction”.
“Nothing will have actually changed following the decision,” he wrote, with the “ultimate scope of this issue primarily sitting” with the Supreme Court and secondarily sitting with the Financial Conduct Authority.
The FCA in 2021 banned discretionary commission arrangements, which were a common feature of the market until the watchdog decided they gave dealers an incentive to raise borrowing costs for consumers.
However, the regulator’s investigation into how businesses had applied commissions goes back to before the ban was put in place, which could put a huge burden on providers.
Lloyds has set aside £450mn to cover potential costs while Santander UK disclosed in its third-quarter results that it had set aside £295mn.
