The Financial Conduct Authority (FCA) has accused motor finance lenders challenging its compensation scheme of advancing an “absurd” interpretation of the law that would allow firms to decide for themselves whether customers are entitled to redress.
In its Grounds of Response filed with the Upper Tribunal, the regulator rejected legal challenges brought by Volkswagen Financial Services, Mercedes-Benz Financial Services UK, CA Auto Finance UK and Consumer Voice against its industry-wide motor finance consumer redress scheme.
The FCA argued that Parliament had given it, rather than lenders, the authority to determine how the scheme should operate.
The legal dispute centres on the FCA’s industry-wide consumer redress scheme, introduced in March to compensate motorists who were treated unfairly under historic motor finance commission arrangements between 2007 and 2024.
The regulator estimates the scheme will return around £7.5 billion to consumers, with total implementation costs of about £9.1bn for the industry.
The challenges have already delayed the FCA’s plans to begin compensation this year.
Earlier this month, the Upper Tribunal agreed to partially suspend the scheme while the legal action is heard, meaning lenders can continue preparing for implementation but are not required to calculate or pay compensation until the case is resolved.
The FCA has said payments are now unlikely to begin before 2027 and warned they could slip to 2028 or later if the scheme has to be redesigned following a successful challenge
Foxes guarding the henhouse
The regulators submission said: “The FCA makes the rules, and the firms have to follow them.
“Nothing in the statutory language indicates an intention of Parliament to let the foxes guard the henhouse.”
The regulator was responding to arguments from lenders over the scope of its powers to require firms to assess consumer harm and calculate compensation under the redress scheme.
Rejecting those arguments, the FCA said: “That interpretation is absurd.
“It would denude the FCA’s rule-making powers and indeed the whole consumer redress scheme mechanism of any substance.”
“Firms would sit as the judge of their own case, free to decide for themselves whether their conduct amounted to wrongdoing, whether it caused harm, whether they should make redress and, if so, of what kind and to what extent.”
Volkswagen Financial Services, Mercedes-Benz Financial Services UK and CA Auto Finance are challenging various aspects of the scheme, including the FCA’s powers to introduce it, its approach to determining liability, causation, redress and limitation.
The Upper Tribunal has partially suspended elements of the scheme while the legal challenges are heard.
Under the agreed timetable, hearings are expected to take place in December 2026 or February 2027, with firms continuing preparatory work while compensation calculations and payments remain on hold.
The FCA has said it will continue to defend the scheme as “the quickest, fairest and most cost-effective” way of compensating consumers.