Barclays Loses Legal Challenge in Car Finance Mis-Selling Case, Potentially Opening Floodgates for Claims

Barclays has suffered a significant legal setback in a case that could have far-reaching implications for the UK car finance industry. The High Court has rejected the bank’s judicial review of a decision made by the Financial Ombudsman Service (FOS), strengthening the position of car finance customers seeking compensation for mis-sold loans.

The case centered on a £1,327 compensation order issued to Barclays in January, following a complaint by Jenna Lewis, who had purchased a second-hand Audi for £19,133 in 2018. The car was financed with a £13,333 loan from Barclays, arranged through the car dealer Arnold Clark. Lewis argued that she had not been properly informed about the commission arrangement between the dealer and the bank. Specifically, she claimed that the dealer had increased the interest rate to boost its own commission, a practice that was not disclosed to her at the time of the sale.

The Financial Ombudsman Service agreed with Lewis, and its decision was echoed in a similar case involving Lloyds. This ruling has played a pivotal role in prompting the Financial Conduct Authority (FCA) to launch a wider investigation into mis-selling practices in the car finance sector. The FCA’s investigation is focused on discretionary commission models, where dealers profited by charging customers higher rates. These arrangements were banned at the end of 2020, but prior to that, 14.6 million car loans were written under such agreements, totaling £8.1 billion in commissions paid by banks.

While Barclays did not seek to overturn the individual compensation owed to Lewis, the bank challenged the broader legal interpretation of consumer credit rules. However, Mr Justice Kerr dismissed Barclays’ judicial review “on all grounds,” a ruling that sent shockwaves through the industry. Following the decision, Barclays’ shares fell by 1.3%, while shares in Lloyds Banking Group and Close Brothers—also implicated in the mis-selling scandal—experienced similar declines.

A spokesperson for Barclays expressed disappointment with the ruling and confirmed that the bank plans to appeal. The ongoing FCA investigation will play a crucial role in determining the full extent of the banks’ potential liability, with RBC Capital Markets estimating that the total compensation could reach as high as £6 billion.

As legal battles continue, particularly with an October ruling by the Court of Appeal suggesting that any undisclosed commission could be considered unfair to consumers, market observers warn that banks could face even larger financial and reputational risks. The UK Supreme Court’s expected ruling next year could further increase these liabilities, with the industry bracing for continued scrutiny of past sales practices.