Motor finance compensation scheme hanging by a thread amid legal row
The City watchdog has told lenders to prepare for the “alternative scenario of no scheme” in the long-running motor finance scandal as another legal showdown brews.
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 is facing an omnibus claim for Consumer Voice, where is represented by Courmacs Legal.
The regulator said on Friday it would “defend [the scheme] robustly” but warned the legal challenges were 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.”
Should the scheme go ahead as planned, compensation payments, which are expected to average at £830, to consumers are expected to begin in late 2026.
Motor finance lenders accuse FCA of violating of Human Rights Act
The return to the legal arena comes after the motor finance scandal – which relates 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 in the land ruled last year in the favour of lenders on two out of three cases brought to the Justices, 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 and brought the overall costs for the industry down to £9.1bn, from £11bn previously. It came after the number of qualifying agreements for the scheme dropped 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 of the applicants regarding the alleged unlawful interference with lenders’ property rights under the Human Rights Act 1998.
Despite being amongst 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 whilst it was “disappointed” it 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.