High Court sides with financial ombudsman in landmark commission case

The High Court has ruled in favour of the Financial Ombudsman Service (FOS) in a dispute concerning a discretionary commission arrangement (DCA) within a motor finance agreement.

The case involved Barclays Partner Finance, who challenged the ombudsman’s decision to uphold a consumer complaint over unfair commission disclosures through a Judicial Review.

The lender’s appeal, consisting of three grounds of challenge, was dismissed entirely and confirmed that the ombudsman correctly interpreted the relevant rules and the Consumer Credit Act 1974, confirming that both the lender and the car dealer failed to meet disclosure standards.

The judge found that the FOS was justified in determining that Barclays Partner Finance and major dealership group Arnold Clark had not adequately informed the borrower about commission arrangements. This failure, the court held, rendered the relationship between the borrower and lender unfair.

Commenting on the ruling, a Barclays spokesperson said: “As we have previously stated, this challenge related to a single, specific case on which we disagreed with the FOS’s decision.” The spokesperson added “we are disappointed in the court’s ruling and will be appealing.”

The FOS had ordered Barclays Partner Finance to pay the customer the difference between the payments she made at the flat interest rate set by the broker and the payments she would have paid if the agreement had been set up at the lowest, zero discretionary commission paying interest at a rate of 2.68%. 

Earlier this year at a Vehicle Remarketing Association event, Jonathan Kirk KC of Gough Square Chambers, who was engaged in the Judicial Review for the appellant said the FOS' approach had not considered the realities of car buying.

The outcome adds momentum to growing scrutiny over commission arrangements in the motor finance industry, where lenders and dealers may withhold key information about commissions earned.

The decision arrives amid a broader review of both discretionary (DCA) and non-discretionary (non-DCA) commission arrangements by the Financial Conduct Authority (FCA) which aims to identify potential misconduct, determine the extent of consumer losses, and ensure appropriate compensation processes are put in place.

The High Court judgment is expected to trigger a significant surge in complaints against motor finance firms, with many consumers seeking redress for historic commission arrangements. Firms have been granted additional time to issue final responses to DCA-related complaints while the investigation is ongoing.

The Supreme Court is already preparing to hear appeals on three related motor finance cases involving both DCA and non-DCA commission models where the Court of Appealed ruled in favour of the consumer. These appeals focus on the interpretation of common law, equitable principles, and the Consumer Credit Act.

While the High Court ruling provides clarity on DCA-related complaints, the Supreme Court’s decision could set a further precedent for complaints involving non-DCA commission agreements.

Legal and compliance specialist Auxillias, in the wake of the High Court ruling, said: "This is another blow for the motor finance industry following the Court of Appeal decision in Johnson and now this judicial review falling in favour of FOS."

The FCA said it plans to issue an update on its DCA review by May, alongside developments on non-DCA complaints. However, it noted that the timing and substance of this update will depend heavily on the Supreme Court’s progress and ultimate ruling.

To mitigate potential chaos caused by an influx of consumer complaints, the FCA has also proposed extending the response timeline for non-DCA motor finance complaints. A final policy statement on this proposal is expected by 19 December.

The FCA said it welcomed the decision, stressing its role in safeguarding fairness and transparency for consumers while FOS deputy chief ombudsman James Dipple-Johnstone said: “When people take out a car loan, it’s imperative they are treated fairly, and the financial implications are transparent. Large numbers of people are concerned that they have been overcharged for their motor finance.

"Today’s judgment endorses the approach taken by the FOS and brings clarity about the law and regulations for discretionary commission arrangements. We are now carefully considering the judgment and what that means for other similar cases that are with our service." 

Responding to the High Court’s judgment in the Judicial Review, Stephen Haddrill, director general of the Finance & Leasing Association said: “We note the High Court’s decision, which relates to a single case and which Barclays is planning to appeal. With the Supreme Court due to discuss similar issues in spring 2025, we look forward to that process.”

In Detail: Miss L vs Barclays Partner Finance

In November 2018 Miss L took out a conditional sale agreement with Barclays Partner Finance at a dealership to buy a £19,133 car, borrowing £13,333 at a 4.67% flat interest rate and 8.9% APR. The total charge for credit was £3,113, entirely made up of interest.

The dealership, as broker, received £1,326.60 in discretionary commission from Barclays PF, plus a second payment of £266.66, or 2% of the credit amount, was paid by Barclays PF to the dealer group's head office.

The ombudsman heard that Barclays PF was prepared to lend to Miss L at a flat interest rate of between 2.68% and 15.25%, with any amount charged above the 2.68% minimum going to the broker as commission.

A flat interest rate of 4.67% was selected by the dealership/broker, and although it disclosed that lenders typically paid it a fee for introductions it did not disclose that Barclays would pay it nor provide any information about the context by which it would be paid commission.

The ombudsman pointed out that Barclays' agreement with the broker provided for "differential commission rates" and as such, Barclays PF should have entered into the arrangement where the payments were justified by extra work. "The discretionary commission arrangement in this case was not linked to the amount of work carried on by the broker," said the ombudsman's ruling.

"By introducing and operating the discretionary commission arrangement with the Broker on the terms it did, Barclays PF acted contrary to the guidance at CONC 4.5.2G and failed to have due regard to Miss L’s interests and treat her fairly as required by Principle 6," it added.

It said that Miss L, had she known about the discretionary commission arrangements, would not have been prepared to pay the dealer such a significant amount for the introduction to Barclays PF particularly that the dealer would already earn the £266 payment to head office.

To address this "unfair relationship", the ombudsman has ordered Barclays PF to pay Miss L the difference between the payments she made to the agreement at the flat interest rate set by the broker and the payments she would have paid if the agreement had been set up at the lowest, zero discretionary commission paying, flat interest rate of 2.68%. In addition, Barclays PF was told to reduce the remaining monthly payments to reflect what they would have been had her contract been at 2.68% flat rate, not 4.67%

The full ruling can be downloaded here