FCA publishes update on motor finance redress scheme challenges

The Financial Conduct Authority (FCA) has issued a statement offering guidance to both lenders and consumers following challenges to its motor finance redress scheme brought by Consumer Voice and three lenders.

In the statement, published on the afternoon of Friday, 8 May, the regulator reaffirmed that it would 'robustly' defend the scheme. According to the FCA, the challenges are unlikely to be heard by the Upper Tribunal before October 2026. The regulator has indicated that lenders should 'prepare on a precautionary basis’ to continue complaint handling within the usual statutory timeframes from mid-November 2026, on the basis that the Upper Tribunal may quash some or all of the redress scheme.

What does this mean for motor finance claims?

The challenges mean there will be a delay in implementing the redress scheme and in making compensation payments for eligible complaints.

The FCA has said that it 'will be pragmatic and will not require firms to communicate to customers as required by the scheme timetable.' The regulator added that it would 'keep this under review' as it becomes clearer when the Upper Tribunal will hear the challenges and provide further communications and guidance in due course where appropriate. For complaints that feature elements within and outside the scope of the scheme, it will also consider whether lenders should now progress those that fall outside it.

The FCA confirmed that lenders should continue to deal with complaints that are entirely out of scope of the scheme in the usual way.

Does this impact the FCA’s pause on complaint handling?

No. The pause on complaint handling will lift on 31 May 2026, after which lenders will, in most cases, have eight weeks to provide a final response to motor finance complaints. This only affects complaints for agreements outside the scope of the redress scheme. Agreements within the scope of the redress scheme will be dealt with once there is clarity on whether the scheme will proceed, unless consumers choose to proceed outside the scheme.

The regulator stated an 'indicative assumption' in its contingency planning notes that there will be no further extension of the pause for agreements currently within the scheme's scope in the event the scheme is quashed by the Upper Tribunal.

What happens if the scheme is quashed?

If the Upper Tribunal decides that some or all of the redress scheme is unlawful, the FCA has stated that it would not immediately publish further rules or guidance on redress methodology. Consumers could continue to pursue complaints and would retain the right to escalate any complaint to the Financial Ombudsman Service (FOS) should their lender not respond within the eight weeks or if they are not satisfied with the final response they receive. The regulator says that, in this event, lenders would need to draw on the Johnson, Wrench and Hopcraft judgments, and on the reasoning of the Upper Tribunal, in making final decisions.

The FCA also stated that it would consider how it could require, supervise, and enforce on firms an obligation to contact consumers proactively if they have not complained, so that they do not miss out on redress to which they may be entitled.

It is our view that it is unlikely that the redress scheme will be quashed entirely, although it is possible that the Upper Tribunal may rule that some elements must be reconsidered. We also note that one of the challenges, from Consumer Voice, has been brought on the basis that it is too favourable towards lenders. It is also therefore possible that the Upper Tribunal will rule that the regulator needs to make changes that could favour consumers, such as amending its redress calculation methodology so that consumers receive more compensation for their eligible agreements.

On what grounds is the scheme being challenged?

Consumer Voice and the three lenders who are challenging the scheme, Mercedes-Benz Financial Services, Volkswagen Financial Services, and Crédit Agricole, all argue that the regulator’s rules are unlawful either in full or in part. The challenges relate to all three of the ‘relevant arrangements’ under which an eligible claim may arise: 

• discretionary commission arrangements (DCAs); 
• high commission arrangements, defined as commission that is 39% or more of the total cost of credit and 10% or more of the loan; and 
• tied arrangements.

In addition to the challenge against the redress calculation methodology, which was already known to be the basis for Consumer Voice’s challenge, other aspects of the rules that the Upper Tribunal will review and rule on include:

• whether the FCA has the power to set the redress rules as it has done, and its approach to identifying consumers’ losses in deciding that it has that power;
• how the rules apply to motor finance agreements entered into before 1 April 2014. The regulator anticipated this challenge, as noted in its reasoning for splitting the scheme into two on page 14 of Policy Statement 26/3. This would have allowed the scheme to proceed for agreements entered into after this date, were there no challenges to the broader scheme;
• the FCA’s application of the law regarding limitation periods, which affects whether consumers suffered harm and which redress is due; and
• the rules for determining whether lenders are liable and whether consumers suffered harm, including rules requiring lenders to presume that non-disclosure of a relevant arrangement amounts to an unfair relationship under Section 140A of the Consumer Credit Act 1974 and whether an unfair relationship caused the consumer harm.

What should consumers do now?

The regulator continues to encourage consumers to raise a complaint with their lender if they have not already done so. Should the redress scheme proceed, you will be able to claim any compensation you are owed at no cost. You will also have the right to complain to the FOS if you are dissatisfied with your lender's compensation offer, subject to the framework set out in the scheme rules, or with the final response you receive to a complaint that you bring outside the scheme.

Are there benefits to using professional representation?

There are many reasons why you may wish to use professional representation for your motor finance claim, and there are potentially several benefits of choosing to do so. These reasons and benefits may become even more compelling in light of the challenges to the FCA’s redress scheme, which may make the prospect of dealing with lenders and assessing and verifying compensation calculations yourself even more daunting.

Register your claim with Harcus Parker

If you feel you would prefer professional representation to assist you in getting the motor finance compensation you are owed, a solicitor can help. By assessing your case on an individual basis, we can ensure your unique circumstances are fully evaluated, regardless of the uncertainty surrounding the broader scheme. You can register your claim with Harcus Parker here.