Barclays to take car finance appeal to Supreme Court

Barclays is to appeal after losing its judicial review at the High Court, where the bank sought to challenge the Financial Ombudsman Service’s (FOS) decision to uphold a complaint in a car finance arrangement involving a discretionary commission agreement (DCA). The payment formed part of a finance agreement between Clydesdale Financial Services, trading as Barclays Partner Finance, and Jenna Lewis, when she bought a second-hand car in 2018 from the dealership Arnold Clark.  

A Barclays spokesperson said: “This challenge related to a single, specific case on which we disagreed with the Financial Ombudsman Service’s decision. We are disappointed in the court’s ruling and will be appealing.”

James Dipple-Johnstone, FOS deputy chief ombudsman, said it was “carefully considering the judgment and what that means for other similar cases that are with our service.” Latest FOS data for Q2 2024/25 indicates the number of complaints related to car finance has shot up to 11,817, more than double the 4,622 recorded in the same quarter last year.  

Commission disclosure

The judgment shows Mr Justice Kerr, who heard the case, outline key issues including:

• whether the Ombudsman misinterpreted the relevant provisions of the FCA Handbook governing the conduct of regulated persons and bodies in the financial services industry;
• whether the Ombudsman was right to conclude that the commission arrangements between Clydesdale and Arnold Clark should have been disclosed or more fully disclosed to Ms Lewis;
• whether Arnold Clark should be permitted to rely on additional grounds of challenge separately from and independently of Clydesdale’s grounds;
• whether Arnold Clark was treated by the Ombudsman in a manner that was procedurally unfair;
• whether Arnold Clark should be permitted to rely on expert opinion evidence not before the Ombudsman, namely, a report dated 27 August 2024 on interest rates and finance deals available in the motor finance market;
• whether the Ombudsman erred in law, disregarded relevant considerations or reached an irrational conclusion when deciding to make a monetary award in favour of Ms Lewis;
• whether the Ombudsman erred in law in deciding that under provisions in the CCA, Arnold Clark was the deemed agent of Clydesdale when Arnold Clark dealt with Ms Lewis in November 2018.

Conflict of interest

The judge dismissed the challenge on “all the grounds”. Examining the background to the case, he noted that FOS argued  the existence and amount of commission could affect the broker’s impartiality in recommending the finance agreement because Arnold Clark could set the interest rate and had an incentive to set a high one, saying that “this created a conflict of interest” as “knowledge of the existence or amount of the latter’s commission could impact on Ms Lewis’ transactional decision.”

The judge stated: “Both limbs of CONC 4.5.3R were engaged. To comply with it, Arnold Clark should have disclosed the existence of both its commission payments and indicated in a prominent way, such as in the IDD (initial disclosure document), their existence. In addition, Principle 8 (requirement to manage conflicts of interest fairly) and Principle 6 (requirement to pay due regard to the interests of Ms Lewis and treat her fairly) required Arnold Clark to disclose the source of the conflict. “

Unfair treatment

On the question of whether the lender should have disclosed the nature as well as the existence of any commission payable, the judge said that “the argument that absent an express requirement to disclose their “nature”, CONC 4.5.3R could not require disclosure of more than the bare fact that a commission was payable, is unattractive because it treats CONC 4.5.3R in isolation, not in harmony with its neighbours (Principles 7 and 8, CONC 3.3.1R and CONC 3.7.4G(2)).”

He went on to say: “I have reached the conclusion that in the 2018 version of CONC 4.5.3R, using the word “existence” simpliciter, the wording of the rule was then already wide enough to require, in some cases, disclosure of more than the bare fact that commission, a fee or other remuneration would be, or could be, payable. It was open to the Ombudsman, in my judgment, to decide that this was a case in which the disclosures made fell short of what CONC 4.5.3R then required.”

The Ombudsman considered that what was disclosed was inadequate in respect of both the existence of the head office commission, which was standard, and in respect of the existence of the discretionary commission, which was unusual and indicative of an acute conflict of interest not adequately flagged up in the IDD or the conditional sale agreement.

Judge Kerr emphasised: “The requirement was to disclose “the existence of any [his italics] commission or fee or other remuneration payable to the credit broker by the lender”.

In addition, Judge Kerr stated: “I agree with the FCA that the accusation of unfair treatment is not satisfactorily answered by invocation of market forces and a claim to have served the customer handsomely in the market place while ensuring no more than reasonable remuneration for the broker.

“The customer’s borrowing costs are increased by the broker’s choice of an elevated interest rate. That is so whether or not, in the self-serving view of the lender and the broker, she is more than compensated for that by other features of the transaction.”

The judgment noted: “No ombudsman behaving rationally could find that Ms Lewis would successfully have negotiated the interest rate down to the floor level, it was submitted. Ms Lewis herself did not say that; Arnold Clark’s website announcement contradicted it; so did its sales history in November 2018; the brokerage agreement assumed an average APR not below 6.9 per cent, meaning that a rate as low as 2.68 per cent would be wholly exceptional.”

FCA response

The FCA said it welcomed the additional clarity the judgment brings to consumer complaints involving DCAs. 

The regulator said: “The Judge found that the Financial Ombudsman had interpreted our rules and the Consumer Credit Act 1974 correctly when deciding that the lender and car dealer involved in this case did not meet the relevant standards in place at the time. The Financial Ombudsman was entitled to find that the dealer and the lender did not adequately disclose their commission arrangements to the borrower and that the relationship between the lender and the borrower was unfair in those circumstances.”

“One unholy mess”

The Supreme Court recently confirmed it will hear an appeal early in the New Year against the Court of Appeal’s judgment in three other motor finance cases involving both DCAs and non-DCAs, which the FCA has said it will need to take into account when determining its next steps, which it is due to set out in its DCA review in May 2025.

The appeal relates to the application of common law, equitable principles and the Consumer Credit Act, rather than FCA rules.  However, when FCA CEO Nikhil Rathi gave evidence at a recent session of the Treasury select committee, the chair described the current situation as “one unholy mess that has landed now on you as well as consumers, and it is going to take a long time to resolve.”

With regard to any future redress system, Rathi told the committee: “Now we will have to see where the courts get to. One of the choices that we will have—and if we go down that route, we would consult on it—is whether it is complaints-led or system-wide. Is it one in which if you are dissatisfied you complain and then you opt in, or is it one where we say to the entire market, ‘You have to go and trace all your consumers over whatever time period is decided and then pay them compensation?’.”