(Bloomberg) -- Barclays Plc kicked off a London court challenge over its car loan practices, in a case that the lender said has implications for a potential multi-billion pound bill facing Britain’s banks.
Barclays is appealing a ruling that it failed to treat a customer fairly when she bought a used car, arguing that the decision would serve as a template for how future complaints are handled ahead of a broader Financial Conduct Authority review.
The Financial Ombudsman Service said the customer could have ended up paying a higher interest rate because of an undisclosed commission arrangement with a broker. Barclays’ Clydesdale Financial Services paid the broker a commission of £1,320 ($1,727) in relation to the auto loan.
“The parties are not really here about a dispute about £1,300,” Ben Jaffey, Barclays’ lawyer, said in court on Tuesday. “This case is a lead case.”
The FCA has been reviewing historical commission for car loans since January and warned that Britain’s lenders needed to prepare for additional costs as part of a possible compensation program. Analysts have said the potential compensation costs for the industry could be anywhere between £2 billion and £10 billion.
Still, Barclays has opted not to make a provision for the investigation, while Lloyds Banking Group Plc, the biggest provider of car finance, has set aside £450 million to pay for possible compensation and other costs. Close Brothers Group Plc, where one-fifth of the loan book is dedicated to motor finance, has said it won’t pay any dividends for the 2024 financial year as it looks to strengthen its balance sheet while the review continues.
On Tuesday, Barclays’ lawyers said the customer got a “good deal,” saying that she paid an interest rate that was lower than the market rate. The bank doesn’t offer a direct service to consumers, but provides the loans through brokers.
The FCA banned so-called discretionary commission arrangements in 2021, saying the practice incentivized car dealers to increase a customer’s borrowing costs. Then in January, the regulator said it was aware that auto lenders were facing a deluge of complaints from consumers alleging their loans were priced in a way that treated them unfairly. The FCA has paused its probe while the legal challenge is decided.
In its legal filing, the watchdog said the UK’s ombudsman for consumers with financial complaints came to the correct decision when it took into account the FCA’s own rules.
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