Barclays, one of Britain’s major motor finance providers, has initiated a legal challenge against the Financial Ombudsman Service (FoS) following a ruling that it unfairly paid commission to a car finance broker.

This news, first reported by Sky News, underscores a mounting apprehension among leading banks regarding the potential magnitude of an industry-wide compensation obligation.

The dispute centres on a specific case involving a customer referred to only as Miss L, who was not informed that a loan agreement included a commission payment of nearly £1,600. The FoS decision, issued in June, deemed Barclays to have acted unfairly and unreasonably in this matter. However, Barclays contests this ruling, citing what it perceives as misinterpretations of the law.

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FCA’s motor finance probe sparks misconduct risk concerns in UK banking sector: Fitch Ratings

This legal challenge occurs amid a wider inquiry launched by the Financial Conduct Authority (FCA) into historical discretionary commission (DiC) arrangements in motor finance. The FCA’s investigation encompasses loans issued between 2007 and 2021.

In July 2019, Barclays Partner Finance announced its withdrawal from the motor finance market following an internal review.

Barclays Partner Finance withdraws from motor finance market

Prompted by a surge in complaints, the FCA’s inquiry has raised concerns among investors about potential compensation liabilities amounting to tens of billions of pounds, akin to the payment protection insurance (PPI) scandal.

Analysts at RBC, an investment bank, have suggested that the motor finance industry may face potential liabilities of around £16 billion.

In response to the FCA’s probe, Lloyds Banking Group provisioned £450m in its annual results for potential compensation linked to interest-based commission payments. Additionally, concerns have extended beyond high street banks to include mid-sized bank like Close Brothers, which recently unveiled a £400m plan to preserve capital amidst market uncertainties.

Barclays has clarified that its legal challenge targets the FoS ruling rather than Miss L or other involved parties. The bank maintains that it has complied with the Ombudsman’s award and ensured that the customer does not suffer financial detriment due to the dispute. Furthermore, Barclays says it supports the FCA’s broader review of the motor finance sector.