Barclays has become the first lender to launch a legal challenge against a regulatory ruling regarding discretionary commission payments, with the news the bank is to apply for a judicial review of one of the Financial Ombudsman Service (FOS) decisions which led to the current Financial Conduct Authority (FCA) motor finance review.
A Barclays spokesperson said: “We do not agree with the Financial Ombudsman Service’s decision in this case and are therefore challenging it. This challenge relates to a single, specific case and we continue to support the Financial Conduct Authority’s review into historic motor financing arrangements. Due to the ongoing nature of this case, we cannot share anything further at this time.”
Barclays Partner Finance Last year FOS upheld a complaint brought 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.
In its evidence to FOS, Barclays PF said it 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.
FOS decision
The Ombudsman disagreed, finding that Barclays PF “did not act fairly and reasonably in its dealing with Miss L”.
FOS said Barclays PF acted contrary to the guidance at CONC 4.5.2G and failed to have due regard to Miss L’s interests and treat her fairly as required by Principle 6 of the FCA Principles for Businesses.
The Ombudsman also cited 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).
FOS ruled that as compensation, Barclays PF should 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.
FCA review
When announcing its review of motor finance in January, the FCA highlighted both the Barclays PF case and one involving Lloyds Bank, parent of Black Horse, where FOS also found in favour of the complainant. The FCA said it was intervening as it believed the decisions were likely to prompt a significant increase in complaints from consumers to firms and FOS.
Subsequently Sheldon Mills (pictured), the FCA's executive director of consumers and competition, said that 75% of the loan agreements between 2007 and 2021 would have had some form of discretionary commission model, although not all consumers would be entitled to compensation.
EY is currently undertaking skilled person's review into the issue, which some analysts are predicting could see banks on the hook for billions of pounds in compensation.
In its annual results in February, Lloyds Banking Group made a £450m provision for potential pay-outs, with RBC analysts suggesting it could face £2bn of claims. A Lloyds Banking Group spokesman said: “We are currently reviewing the recent FOS decision and will support the FCA with its industry review.”
“The regulators are trying to move the financial goalposts many years after the event, with both Barclays and Lloyds making it clear to FOS that they abided by all regulatory requirements in place at the time these arrangements were made. Banks are quite rightly very unhappy about the retrospective nature of the regulator’s actions,” said Edward Peck, CEO of AFC which is campaigning for more proportionality in regulation.
Asset Finance Connect’s UK conference on 6th June at etc venue, County Hall in London will bring together lenders, brokers, legal experts and others to debate the issues raised by the FCA review. For more details, please email lisalaverick@assetfinanceconnect.com.
