Thousands of people who have made complaints to the Financial Ombudsman Service that they were mis-sold car finance face a longer wait before they find out whether they are due compensation.
The ombudsman has received 17,000 complaints about commission on car finance deals, most of which have been made in the past year, The Sunday Times has found. However, Barclays has filed a legal challenge against the ombudsman in the High Court over a decision it made in January that the bank should pay £1,327 in compensation to a customer because of hidden commission in her five-year, £13,000 finance deal. This challenge could hold up the process for customers awaiting decisions from the ombudsman.
Customers can appeal to the Financial Ombudsman Service if a finance company does not resolve your complaint. The ombudsman said that the arrangement involving Barclays had been unfair because the dealer who sold the car and the loan was paid more commission for charging the customer a higher rate of interest. The customer hadn’t been told about this. The ombudsman’s decisions are legally binding.
Barclays is challenging the ombudsman over what it believes were misinterpretations of the law. The bank did not give any more details, and the court filings have not yet been published. The customer will get the full compensation regardless of the outcome.
The ombudsman called the legal challenge “disappointing”. It said: “When people take out a car loan it is imperative they are treated fairly and the financial implications are totally transparent.”
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The judgment, along with another against Lloyds in which it was ordered topay £1,147 in compensation to a customer for a similar commission set-up on a five-year, £7,619 deal, helped spark an investigation by the Financial Conduct Authority (FCA), the City watchdog, into whether there had been widespread unfair treatment of borrowers. Nikhil Rathi, head of the FCA, said in a speech last month that it was “improbable we will find nothing to report” in its investigation, which is due to be completed in September.
The proportion of car finance complaints made to the ombudsman that relate to commission, fees and charges rose from 24 per cent to 49 per cent between 2021-22 and 2022-23. But consumer lawyers fear that Barclays’ legal action could delay decisions on many cases.
Coby Benson, a solicitor at the no win, no fee law firm Bott + Co, said: “The judicial review by Barclays has been launched at the eleventh hour, just a day or two before the three-month deadline to bring a challenge. This is just another example of lenders doing everything possible to frustrate the complaints process and delay things further.”
Matthew Hall from the claims company Hallbrook Partners said: “From our experience in claims where a judicial review was made, we anticipate this might cause a delay to the outcomes of similar claim types, although we hope not.”
The rulings against Barclays and Lloyds are the only decisions the ombudsman has upheld about mis-sold car finance since January, despite the thousands of complaints it has received. Lloyds said it was “reviewing the decision”.
What’s the issue?
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The commission set-up in the Barclays and Lloyds cases, known as discretionary commission, was used in 36 per cent of car finance loans between 2013 and 2016, according to the FCA. Buyers paid an average of £1,100 more interest on a typical £10,000, four-year car finance deal when discretionary commission was applied, it found.
In the Barclays case the borrower paid 4.67 per cent interest over five years on her £13,333 loan — £3,114 overall. Yet she could have borrowed at a cheaper rate of 2.68 per cent, paying £1,787 interest. The ombudsman’s ruling was that the dealer picked the higher rate to earn more commission and the customer should be refunded the difference, which was paid entirely as commission.
• Discretionary car finance commission was disaster waiting to happen
This type of model, with commission linked to the interest rate, was banned in January 2021. The FCA said that this would lead to customers paying £165 million less a year. The regulator’s investigation concerns whether customers were treated unfairly before the ban by not being told about the link between their payments and a dealer’s commission.
Is it the next mis-selling scandal?
Some 93 per cent of new cars are bought on finance, and new lending hit a record £51 billion in 2022, according to trade body the Finance & Leasing Association. The FCA investigation has led to concerns in the City that the banking industry faces another payment protection insurance (PPI) mis-selling scandal. Banks paid out more than £40 billion in compensation for mis-sold PPI — the selling of insurance to those who did not need it.
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Estimates for the car finance compensation bill run well into the billions too. Benjamin Toms from Royal Bank of Canada Capital Markets, an investment bank, thinks it could be £8 billion. The investment bank Jefferies estimates that it could be £13 billion. Toms has estimated that Lloyds could face a £2.5 billion hit, Santander UK £1.1 billion, Barclays £357 million and Close Brothers £252 million. In its annual results in February Lloyds said it had set aside £450 million to cover costs relating to the FCA investigation.
Close Brothers, which has a £1.9 billion outstanding car finance loan book, has suspended its dividends to shareholders, and said last month that it would lend less to conserve up to £400 million to cover possible compensation. Neither Barclays, which stopped new car finance lending in 2019, nor Santander has officially set aside money to cover potential compensation.
On Friday the FCA warned lenders they needed to maintain enough resources to cover the cost of dealing with increased complaints.
Can you still complain?
In January, when the FCA announced its investigation into car finance commission, it said it would pause the eight-week limit for finance firms to respond to complaints from November 17, 2023, to September 25. If you made a complaint to your bank before November 17 you can take this to the ombudsman if you have a final response. But the Barclays challenge may mean a long delay before you get a decision.
You can complain to your car finance company if you think you were overcharged because of commission, but don’t expect a decision before the FCA finishes its investigation in September.
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• Who can claim compensation for car finance?
“The ombudsman is trawling through cases at a glacial speed, and lenders are still disputing any decisions in favour of the consumer,” Benson said. “It feels like lenders are being given an easy ride, and it is the innocent consumers who suffer. A landmark ruling has been made, yet the speed at which claims are being dealt with is allowing for the lenders to stall and affected consumers to wait for wrongs to be put right.”
The Financial Ombudsman Service said it had a two-stage process with complaints: an initial assessment followed by a final decision if the first step had not resolved the complaint. It has issued more than 1,000 initial assessments since the Barclays and Lloyds judgments.
‘The FCA told lenders they must tell a consumer if their case involved discretionary commission if they asked.
‘No update four years after I complained’
Jake Hardy has waited almost four years to find out if he is entitled to compensation for his car finance deal.
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Hardy, 33, bought a nine-month-old Vauxhall Astra for £12,731 in September 2014, paying about £245 a month on a five-year hire purchase contract at 4.62 per cent, before buying the car outright. Around this time rates on loans could be as low as 3 per cent.
He contacted the law firm Bott & Co in 2020 after reading about issues with car finance. Hardy did not know if he had paid commission to the dealer, but suspected he may not have got the cheapest interest rate. A complaint was made to Vauxhall Finance in May 2020. Hardy asked if his deal included discretionary commission but has still not been told. He took his complaint to the Financial Ombudsman in December 2020, but his case was not allocated to an investigator until August 2023. There has been no update since.
“We keep being promised an update and there hasn’t been one. It’s been going on for so long, I’m disappointed. I think a decision could still be years away. I’m not holding my breath.”
The Financial Ombudsman Service said it could not comment on individual cases. Vauxhall was asked for comment.
