Barclays faces blow over car finance mis-selling as court upholds ombudsman ruling

Barclays has lost a pivotal legal challenge that strengthens the hand of car finance customers seeking damages for mis-sold loans.

In a ruling with far-reaching implications for UK lenders, the High Court has rejected a bank judicial review of a Financial Ombudsman Service (FOS) decision, potentially opening the door to billions of pounds of claims.

At the heart of the case was a £1,327 compensation order issued to Barclays in January, as a result of a complaint made by Gina Lewis. In 2018, Lewis bought a used Audi for £19,133, part-funded by a £13,333 Barclays loan arranged through car dealer Arnold Clark. Lewis later argued that she had not been properly informed of the commission arrangement: the trader had unfairly increased the interest rate to boost his commission – an arrangement she claimed had never been clearly disclosed.

The Ombudsman’s findings, mirrored in a similar case against Lloyds, have contributed to the Financial Conduct Authority (FCA) launching a wider investigation into historical mis-selling across the sector. Discretionary commission models, under which dealers profited by charging customers higher rates, were banned at the end of 2020. Before the ban, 14.6 million car loans were written under such agreements, including £8.1 billion of commissions paid by banks.

Although Barclays did not seek to overturn Lewis’s individual compensation, it did seek a judicial review to clarify legal interpretations of the underlying consumer credit rules. Judge Kerr dismissed the bank’s appeal “on all grounds”, a ruling that shook share prices across the industry. Barclays shares fell 1.3%, while Lloyds Banking Group and Close Brothers – also embroiled in the wider mis-selling scandal – saw similar declines.

A Barclays spokesman expressed its disappointment and confirmed its plans to appeal the decision. The FCA’s ongoing investigation will be crucial to determining the extent of lenders’ exposure to risk. RBC Capital Markets estimates that the resulting compensation could reach £6 billion.

Market watchers say much depends on the legal battles yet to come. In October, the Court of Appeal ruled that any undisclosed commission, not just discretionary arrangements, could be unfair to consumers. If the UK Supreme Court upholds this ruling next year, banks’ liabilities could soar beyond today’s dire projections.

For now, Barclays’ loss provides clarity on one point: As regulators and courts continue to scrutinize auto finance agreements, major lenders face an increasing challenge in containing the financial and reputational costs caused by past sales practices.