Ben Rees, Technical Director of the Investment Fraud & Mis-selling group, explores Barclays’ timeshare scandal and highlights the avenues of redress available to consumers who are affected by the mis-selling of financial services, in Compliance Monitor.
Ben’s article was published in Compliance Monitor, 12 October 2021, and can be found here.
Barclays has agreed to pay compensation in respect of loans for timeshares in Malta, which were mis-sold loans totalling some £48 million to almost 1,500 consumers. The bank agreed to the settlement in June 2021, in the wake of revelations that Azure Services Limited – which was not authorised by the FCA – brokered loans from Barclays Partner Finance to enable consumers purchase timeshares in Malta.
Consumers were also told that these timeshares could easily be sold on later at a higher price, but in reality many found little market appetite for them. A spokesperson for Barclays said: “We recognise that we did not provide the right level of service for some customers who bought timeshare loans via Azure Services Ltd between April 2014 and April 2016, and we will be contacting those impacted to apologise for what has happened, and to let them know how we will be putting this right.”
This conciliatory move followed the bank’s decision to abandon its opposition to the Financial Conduct Authority’s (FCA) demands to repay interest charged on loans issued between April 2014 and April 2016 by Azure Services Limited.
Barclays Partner Finance (BPF) breached the Financial Services and Markets Act, 2000 (FSMA) by brokering consumer credit loans to customers purchasing timeshares through an unauthorised firm. Azure Services Limited was an unregulated firm and BPF did not obtain the proper authorisation to broker finance agreements with them until April 2016. BPF was therefore held to have mis-sold these loans in the time period prior to authorisation being obtained.
The FCA investigated the matter and made an initial order for BPF to repay interest charged on loans issued between April 2014 and April 2016, along with statutory interest and to cancel all future interest payments. However, the outstanding principal would have had to be repaid by consumers under this initial ruling. Upon appeal, Barclays agreed to reimburse the debt payments in full, in addition to paying 8% statutory interest. A Barclays internal audit reportedly estimated that some 6,000 unenforceable loans were outstanding, and that the bank would have to refund approximately £30m of principal in interest, while also writing off the remaining debt from its balance sheet.
In tandem with action by the FCA, additional pressure was brought to bear on Barclays to agree to resolve the matter by a group litigation consisting of 1,482 individuals. This was initiated in London on the basis that the relevant loans – underwritten by Clydesdale Financial Services Ltd trading as Barclays Partners Finance – were illegal, since the broking intermediary was not authorised by the FCA.
The applicants’ references to the Tribunal resulted from a Validation Order made by the FCA on 5 February 2018 whereby the authority had determined that it was just and equitable to enforce the regulated credit agreements (“the Regulated Agreements”) that had been made between the applicants and Clydesdale Financial Services Limited, trading as Barclays Partner Finance (“BPF”), a company wholly owned by Barclays Bank PLC.
The Regulated Agreements financed the acquisition of timeshare accommodation from a group of companies known as “Azure”. At the time of the references, a total amount in the region of £47 million was outstanding under the Regulated Agreements. BPF became aware that the Regulated Agreements had been brokered by an unauthorised broker within Azure, namely Azure Services Limited (“the Broker”).
This amounted to a breach of the general prohibition in s.19 FSMA against persons carrying out regulated activities in the UK without FCA authorisation or an applicable exemption. Although BPF itself was an authorised person, the Regulated Agreements were made in consequence of something said or done by the unauthorised Broker, acting in breach of the general prohibition. This fact rendered the Regulated Agreement unenforceable against the borrowers pursuant to s.27(1A) FSMA.
The FCA initially ordered BPF to repay interest previously charged on loans issued between April 2014 and April 2016 along with statutory interest and to cancel all future interest payments, however the outstanding principal would have had to be repaid by consumers.
Having presented the case again to the Tribunal, the FCA’s initial decision was, for the most part, upheld. However, the Tribunal ruled that all individuals with loans outstanding will no longer have to pay interest and also that all previous interest payments would be refunded. The Tribunal stipulated that an independent assessor would be appointed to review whether the information provided at the point of taking out the loan was accurate and whether it would have affected the decision as to the granting of the loan in the first place. In particular, the Tribunal required that the following points be assessed:
- Was the affordability assessment was adequate in line with the FCA rules and expectations for that consumer?
- Was the assessment adequate in addressing affordability rather than just credit risk?
- Where BPF is unable to satisfy the authority of 1 and 2 above then a refund of all payments made to date, cancel the Agreement and pay 8% simple interest.
- Where 1 & 2 have not been met to remove any adverse entries on the consumer’s credit file in relation to the agreement.
The appeal triggered the need for a further hearing of the Upper Tribunal (Tax And Chancery Chamber) in London to be presided by the original Tribunal Judge, Timothy Herrington. The original FCA investigation didn’t address important issues such as inadequate financial affordability nor did it examine the high pressure selling techniques employed by Azure sales staff. These issues would however be examined in detail during the appeal process.
In the face of the prospect of these issues being forensically examined in an open Tribunal, Barclays then dropped its opposition and agreed to reimburse debt payments in full in addition to the 8 per cent interest on the loans. It may be that this decision to settle was taken by Barclays in part in order to avoid adverse publicity surrounding the issues which were to be examined in a potentially damaging public tribunal. The reality of a complex and costly ongoing group litigation have also had an impact on Barclay’s decision.
This case shows that when consumers collaborate in group litigation cases, they can pool resources to effectively take on powerful financial institutions and can help drive settlements on favourable terms. The Supreme Court itself recently recognised the benefits which group litigation can provide to consumers. In UK the 2020 Supreme Court judgment in Mastercard v Merricks  UKSC 51, Lord Briggs held that:
“Proof of breach, causation and loss is likely to involve very difficult and expensive forensic work, both in terms of the assembly of evidence and the analysis of its economic effect. Viewed from the perspective of an individual consumer, the likely disparity between the cost and effort involved in bringing such a claim and the monetary amount of the consumer’s individual loss, coupled with the much greater litigation resources likely to be available to the alleged wrongdoer, means that it will rarely, if ever, be a wise or proportionate use of limited resources for the consumer to litigate alone.”
The rationale for consumer group litigation actions has therefore been given the blessing of the highest court in the land. It is clear that such group actions, combined with robust enforcement actions by the regulator, can achieve meaningful results for consumers. Such outcomes also serve as a salutary warning to other financial services providers.
UK consumers who are affected the mis-selling of financial services have several avenues open to them to achieve redress. Depending on the precise circumstances of the case, consumers affected by similar issues may be able to bring a claim under Sections 75 and 140A of the Consumer Credit Act 1974, which can hold a bank jointly and severally liable for the mis-sale of financial products by a retailer or trader. This may be the more effective method, especially if a broker has limited resources or has become insolvent. Any such claim must however be brought within 6 years of the loan commencement, otherwise consumers risk their claims being ruled out of time. It’s also clear that the FCA will not be shy to act when misconduct has occurred and that the combination of regulatory action and litigation can force beneficial settlements for consumers.
The growth in group litigation actions in the UK looks set to continue. This may well have a significant impact on the risk faced by financial services providers long into the future. Indeed, the Merricks v Mastercard case was recently certified by the Competition Appeals Tribunal as the UK’s first ever “opt out” group litigation, which means that a defined group of people are considered plaintiffs unless they opt out of the case. The Mastercard case involves some 46 million plaintiffs who were allegedly overcharged between 1992 and 2008. The advent of cases of such scale and complexity serves to underscore the crucial importance of compliance for all financial services providers.