Barclays motor finance hearing at High Court

This week sees the start of the long-awaited hearing of the judicial review case brought by Barclays, which is seeking to challenge one of the Financial Ombudsman Service (FOS) decisions which led to the current Financial Conduct Authority (FCA) motor finance review.  The outcome is eagerly anticipated, as it is likely to have a significant influence on any redress scheme set up by the FCA once its review concludes next May.

The case opened on October 15th and is listed to last three days. It concerns a claim brought to FOS by a car buyer identified as “Miss L” about the commission Clydesdale Financial Services (trading as Barclays Partner Finance) paid to a credit broker when she took out a conditional-sale agreement to buy a car in November 2018.

Barclays PF paid £1,326.60 to the broker’s local dealership under a discretionary commission arrangement and made a second payment of £266.66 to the broker’s head office, which was equivalent to 2% of the credit amount (£13,333).

Miss L complained that Barclays PF acted unfairly by paying the broker commission without her knowledge, and by operating a commission model that linked the commission the broker received to the interest rate on the agreement, whilst allowing the broker the discretion to adjust the interest rate.

 FOS found that Barclays PF “did not act fairly and reasonably in its dealing with Miss L”, citing the “inequality of knowledge and understanding” created by Barclays PF’s failure to disclose the structure of the discretionary commission arrangement in accordance with regulatory requirements and guidance (specifically, CONC 4.5.3R, CONC 3.7.4G(2) and Principles 7 and 8).”

As a result, Barclays was ordered to pay Miss L the difference between the payments she made under the finance agreement at the agreed rate of 4.67% and the payments she would have made had the finance agreement been set up at 2.68%, representing the lowest flat interest rate permitted, plus interest at 8% on each overpayment.

Judicial review

Barclays challenged the decision, having said in its evidence to FOS that it had complied with the legal and regulatory obligations that applied at the time and that Miss L was not in any event treated unfairly taking into account all the circumstances of the transaction.

In the opening session of the High Court challenge, Barclays legal representative Ben Jaffey said the finance provider has paid the customer compensation and will not seek to recover that money even if it wins its challenge.

According to a Reuters’ report,  Jaffey told the court: “The parties are not really here for a dispute about £1,300 pounds,” and noted the case’s outcome is “likely to be viewed as a template or model for other cases”, which will affect other complaints to the FOS and individual lenders, as well as the FCA’s planned redress scheme.

The FCA has already said it is “more likely than not” it will introduce some kind of redress scheme once its review is complete. There has been considerable speculation about whether this would mean a blanket compensation offer or a more targeted approach, and estimates of the likely cost to lenders vary.  While the FCA itself has said this is “not a repeat of PPI”, some analysts suggest funders could be on the hook for up to £16bn.

“But it is a worry that it has taken so long to get to this point, and we still do not know how the FCA will react to any court decision. This uncertainty has had a detrimental effect on lending, to the consumer’s disadvantage.  The Prime Minister has said he wants a bonfire of regulations which are slowing growth, and there is a clear opportunity for the new Government to intervene here to make the FOS/FCA double act work properly for the good of consumers and industry.

“The next AFC conference in November will focus on the likely impact of the new UK Government on the auto, equipment and asset finance industries and we will be exploring this issue in more depth then.”

Find out more about AFC’s November conference here.