The motor finance compensation scheme is hanging by a thread amid a new legal row, with the City watchdog telling lenders to prepare for the possibility of no scheme at all. The Financial Conduct Authority (FCA) has received four legal challenges, including from lenders Volkswagen Financial Services, Mercedes-Benz Financial Services, and Crédit Agricole Auto Finance. On the consumer side, the regulator faces an omnibus claim from Consumer Voice, represented by Courmacs Legal.
FCA Defends Scheme but Warns of Contingency Plans
The FCA said on Friday it would “defend [the scheme] robustly” but warned that the legal challenges are calling for the Upper Tribunal to “‘quash’ or invalidate” it. “It is important that all involved now also focus on contingency plans and prepare for the alternative scenario of no scheme, as we set out consistently through the consultation,” the FCA said. The watchdog added it was “prudent… to supervise all lenders against a central planning assumption that under that scenario there would be no scheme.”
Potential Compensation Payments at Risk
Should the scheme go ahead as planned, compensation payments averaging £830 per consumer are expected to begin in late 2026. However, the legal challenges threaten to delay or derail the entire process.
Legal Challenges Allege Human Rights Violations
The return to the legal arena comes after the motor finance scandal—relating to ‘secret’ commission deals between lenders and dealers that left customers in the dark—travelled through the Court of Appeal and the Supreme Court. The highest court ruled last year in favour of lenders on two out of three cases, but the door was opened for an industry-wide redress scheme on the grounds of ‘unfairness’ after the commission charged to one consumer was found to be outsized. The final rules of the scheme were announced at the end of March, bringing overall costs for the industry down to £9.1bn from £11bn previously. This followed a reduction in the number of qualifying agreements to 12.1m from 14.2m.
Challenges to the scheme have been filed on the FCA’s application of the law relating to limitation periods, which affects whether consumers have suffered loss or damage for which compensation is payable. The regulator added it had received a challenge by at least one applicant regarding the alleged unlawful interference with lenders’ property rights under the Human Rights Act 1998.
Some Banks Opt Out of Legal Action
Despite being among the most exposed to the scandal, a handful of the City’s banks have turned away from legal action. Lloyds Banking Group—which has set aside £2bn in payouts—said it was “disappointed” but would not challenge the scheme. Meanwhile, Santander raised its provisions to £640m, leading to a first-quarter profit hit, but the Spanish banking giant has also confirmed it will not challenge the scheme.
