Barclays has launched a legal challenge over a ruling that it unfairly paid commission to a car finance broker, underlining growing anxiety among Britain’s biggest lenders about the potential scale of an industry-wide compensation bill.
Sky News has learnt that Barclays is mounting a judicial review against the Financial Ombudsman Service (FOS) over a decision last June that the bank “failed to act fairly and reasonably” in the case of a customer – known only as Miss L – who was not made aware that a loan agreement she entered into included a commission payment worth nearly £1,600.
City sources said on Monday that Barclays had recently decided to launch a legal fight but insisted that its challenge was isolated to the specific case of Miss L because of what it believed were a number of misinterpretations of the law.
According to the FOS, Miss L’s case involved a commission paid by Barclays Partner Finance to a credit broker when she took out a loan to buy a car in 2018.
The case was one of two highlighted by the Financial Conduct Authority (FCA) in January when it announced that it was responding to a large number of complaints by reviewing historical motor finance commission arrangements and sales “across several firms”.
The City watchdog did not name the individual firms it was examining, but engaged EY, the accountancy giant, to undertake a so-called skilled person’s review into the issue.
The inquiry has sparked concerns among bank investors that they could be exposed to a compensation running to tens of billions of pounds, drawing comparisons with the payment protection insurance (PPI) scandal which dogged lenders’ balance sheets for years.
In its annual results in February, Lloyds Banking Group made a £450m provision for potential compensation arising from the FCA’s probe into interest-linked commission payments.
A case involving Lloyds was also referred to in the FCA’s January statement when it said that the FOS’s decision to uphold customer complaints was “likely to prompt a significant increase in complaints from consumers to firms and the Financial Ombudsman”.
It was unclear whether Lloyds would also seek to mount a legal challenge over the decision to uphold a complaint against it.
Lloyds declined to comment.
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Growing jitters among banks and their shareholders have not been restricted to large high street names.
Close Brothers, the mid-sized specialist bank, has seen its stock hammered over its relative exposure to the issue.
It recently announced a £400m plan to conserve capital by putting the brakes on loan growth and suspending dividend payments.
In a statement following an enquiry from Sky News, 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.”
People close to Barclays pointed out that its legal action was against the FOS decision, not against Miss L or any other interested parties.
They added that the bank had complied with the award required by the Ombudsman and had ensured that the customer would not lose out financially as a result of the challenge.
Barclays, they said, “welcomed” the FCA’s wider review into the sector.