Unlock the Editor’s Digest without spending a dime
Roula Khalaf, Editor of the FT, selects her favourite stories on this weekly newsletter.
Barclays has said it plans to appeal after losing a court case over automotive loan commissions that threatens to open the door to billions of kilos 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 fee of a automotive 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’re upset within the court’s ruling and shall be appealing.”
The court decision is an extra blow for UK banks, which analysts at Moody’s rating agency have estimated could must pay as much as £30bn of redress to automotive loan customers. That will make the difficulty 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 query of whether banks were treating consumers fairly and acting inside the foundations by paying “discretionary” commissions to dealerships, which meant they may earn more by charging some customers the next rate of interest 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 the next commission to a automotive dealership if it arranged a loan with the next rate. The court found this commission was “unusual and indicative of an acute conflict of interest not adequately flagged up”.
The choice comes only per week after the Supreme Court said it could review a ruling earlier this yr by the Court of Appeal, which said consumers needs to be paid compensation by banks over automotive loan commissions that were only partly disclosed or by no means, whether or not they were “discretionary”.
This widened the potential costs for the banking sector of the automotive loan controversy, which has already prompted a flood of complaints to lenders. By appealing against the ruling, Barclays could also be playing for time within the hope that the Supreme Court rules within the industry’s favour.
Close Brothers, Lloyds Banking Group and Santander UK are amongst probably 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 nearly £19,000 by a “Ms Lewis” at an Arnold Clark dealership in Liverpool. The dealership had the choice to extend the rate of interest 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 additional commission from the bank of £1,326.60, which the High Court said was disclosed only in “threadbare statements” within the loan agreement. It upheld the FOS decision to order the bank to repay the upper borrowing costs the commission caused for Lewis plus an additional 8 per cent a yr.
RBC Capital Markets analyst Benjamin Toms predicted in a note on Monday that such a call would affect the share price of other banks with exposure to motor finance but cautioned that it could be “the improper response”.
“Nothing can have actually modified following the choice,” 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 typical feature of the market until the watchdog decided they gave dealers an incentive to boost borrowing costs for consumers.
Nonetheless, the regulator’s investigation into how businesses had applied commissions goes back to before the ban was put in place, which could put an enormous burden on providers.
Lloyds has put aside £450mn to cover potential costs while Santander UK disclosed in its third-quarter results that it had put aside £295mn.
