Legal challenges to motor finance compensation scheme - update from the FCA for firms and consumers

Following the legal challenges to our motor finance compensation scheme, we are setting out further advice for firms and consumers.  

Our priorities remain to secure fair compensation for consumers as quickly as possible and ensure a healthy motor finance market. 

Our industry-wide scheme is the quickest, fairest and most cost-effective way to do this. As we have said, we welcome the commitment of most lenders to implement the scheme and will defend it robustly.   

We have summarised below the grounds of challenge we have received.

It is unclear when the case will be heard. It is unlikely to be before October. We are engaging with the Tribunal and those who have challenged the scheme on the possibility of suspending some elements of it while retaining those relating to preparatory work. We will provide a further update as soon as possible.   

We recognise the operational strain and uncertainty firms face. We also acknowledge the frustration of consumers, many of whom have waited over 2 years for an answer.  

Firms should continue to prepare for the scheme until we communicate otherwise. Work that can be done now and would likely be needed in all scenarios includes: 

• Identifying relevant complaints and agreements. 

• Gathering the data needed to identify commission arrangements and disclosure practices, including where information is held by brokers. 

• Working with claims companies to resolve instances where consumers are represented by more than one party.  

• Cooperating fully and promptly with the Financial Ombudsman Service on any existing complaints that have been referred to it.  

To help us better understand firms' approaches, they should still submit implementation plans by 12 May.  We recognise they may need to qualify those plans and therefore we will not insist on receiving formal attestations by 12 May. Lenders should speak to their supervisor if they have any concerns. 

We will be pragmatic and will not require firms to communicate to customers as required by the scheme timetable.  

We will keep this under review as the Tribunal timetable becomes clearer and engage with lenders and consumer groups on whether any further consumer communications may be appropriate.   

Where complaints include both elements that fall within the scheme and elements unrelated to motor finance commission, we will consider whether firms should now progress the unrelated elements. Complaints that are entirely outside the scope of the scheme should continue to be progressed in the usual way. 

Contingency planning 

We took the unprecedented step of pausing complaints since 11 January 2024. Complaints cannot be paused indefinitely. 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.   

We have not yet made any decisions on what we would do under various scenarios. However, if the scheme, or parts of it, were quashed, we would need to carefully consider all options, taking account of all relevant matters. That would include whether to proceed with a revised scheme. This would likely require further consultation, and any resulting rules or guidance could face further lengthy challenge.

It is therefore now prudent for us to supervise all lenders against a central planning assumption that under that scenario there would be no scheme. Lenders need, therefore, to be operationally and financially ready for a complaint-led and supervisory approach to resolve historic liabilities. 

We recognise the impact this would have on consumers who may not always complain. This would also impose significant extra costs on lenders, which is why we are being clear on our indicative assumptions now to allow adequate time for orderly contingency preparation.   

The initial set of indicative assumptions for this scenario, are: 

• We will continue to actively encourage consumers who are concerned about their motor finance commission arrangements to complain directly to their lender. 

• While we do not know when any Tribunal decision will be made, lenders should prepare on a precautionary basis for mid-November 2026. They should be ready from then to deal with complaints within the usual statutory timeframes. 

• There would be no further extension of the complaints pause. Lenders have already been required to undertake as full preparations as they can for complaints they have received, notwithstanding the pause, and there is adequate time between now and mid-November 2026 to prepare responses to those complaints. 

• Lenders would need to draw on the Supreme Court and High Court judgments and the reasoning in the decision of the Tribunal. There would not immediately be further FCA rules or guidance on redress methodology.   

• We would work closely with the Financial Ombudsman Service to support an orderly market and a smooth consumer experience.  FOS fee and supplementary fee assumptions are as set out in the counterfactual scenarios explained in the cost benefit analysis of our Policy Statement. 

• In the usual way, we would consider how to use supervisory powers (and enforcement powers if necessary) to require firms to proactively contact affected customers who haven't complained. 

We will engage openly with lenders, consumer groups and other interested parties and will update these indicative assumptions as necessary. We welcome constructive suggestions for how large volumes of complaints might be handled fairly and efficiently in this scenario. We will consider approaches specific to individual lenders or types of lender.   

At the same time, we expect all lenders to prepare for this scenario, including ensuring appropriate provisions and by engaging with their auditors.    

Firms should also at all times work closely with the Financial Ombudsman Service, including responding quickly and effectively to information requests. 

Lenders concerned about the conduct of any claims management company (CMC) or law firm should provide evidence of these concerns to the FCA so we can consider this promptly through our review of claims management and joint regulatory taskforce. 

Summary of the grounds for challenge to our scheme 

In the challenges we have received, the applicants argue that the rules governing the scheme (the Rules) are unlawful, either as a whole or in relation to certain parts of the Rules, and they ask the Upper Tribunal to “quash” or invalidate them on that basis.  

The challenges are based on a variety of grounds, some of which are distinct to particular applicants and some of which overlap between them. Between the four separate legal challenges, it is claimed in effect that the FCA's approach to establishing the schemes has been both unduly favourable to consumers and unduly favourable to lenders. The challenges are directed to Rules relating to all three of the “relevant arrangements” with which the scheme is concerned: discretionary commission arrangements, high commission arrangements and tied arrangements.

In summary, and at a high level, the following aspects of the Rules are challenged by at least one of the applicants, and will therefore be issues for the Upper Tribunal to resolve. 

• The FCA's power to make the Rules, and its approach to identifying consumers' losses in deciding that it has that power. 
• The application of the Rules to agreements entered into before 1 April 2014.  
• 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.  
• Rules for determining whether lenders are liable and whether consumers suffered loss or damage, including rules requiring lenders to presume that:
  • there was an “unfair relationship” (within the meaning of s 140A of the Consumer Credit Act 1974) between lender and consumer wherever a relevant arrangement was not adequately disclosed; and 
  • wherever there was an unfair relationship between lender and consumer, it caused the consumer to suffer loss or damage. 
• The Rules governing the calculation of redress, including the rules for estimating consumer losses by adjusting the annual percentage rate they actually paid, the compensatory interest rate and the FCA's consideration of consumers' actual losses.  
• The FCA's application of its statutory objective of protecting and enhancing the integrity of the UK financial system.  
• Alleged unlawful interference with lenders' property rights under the Human Rights Act 1998.  

Advice for consumers

Many people will be frustrated that the legal action will delay payouts due to begin this year. We remain committed to ensuring consumers receive any compensation owed as promptly as possible.  

The best step, if you have concerns, is to complain directly to your lender - this is free, and our website explains how to do it and the contact details for lenders. You do not need a law firm or CMC, which may charge over 30% of any compensation. Don't sign up to multiple CMCs or law firms as you may be charged multiple fees.  

If you've used a claims management company or law firm and you're unhappy with how they have handled your case, or the fees they have charged, you should complain. If you're dissatisfied with their response, you can take your complaint to the Claims Management Ombudsman if the firm is regulated by the FCA, or to the Legal Ombudsman, if they are regulated by the Solicitors Regulation Authority.