FCA warns of “no scheme” motor finance redress scenario

The Financial Conduct Authority (FCA) is advising lenders to prepare for a “no scheme” scenario, as legal challenges to the planned industry-wide motor finance redress proposals may not be heard before October and the pausing of complaints will not continue “indefinitely”. 

In an update the regulator said: “Lenders need, therefore, to be operationally and financially ready for a complaint-led and supervisory approach to resolve historic liabilities.”

Three lenders (Volkswagen Financial Services, Mercedes-Benz Financial Services and Crédit Agricole Auto Finance) and campaigning group Consumer Voice, represented by Courmacs Legal, have challenged the FCA’s proposals at the Upper Tribunal.

The FCA said it will defend its scheme “robustly”, arguing that it offered the “quickest, fairest and most cost-effective way” to handle the many thousands of claims currently paused.  

It is unclear when the case will be heard, but the FCA said it is unlikely to be before October.  The regulator is currently engaging with the Tribunal and the four challengers on the possibility of suspending some elements of it while retaining those relating to preparatory work.

In the short term, the FCA said firms should continue to prepare for the scheme until it says otherwise. This 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.  

Firms must still submit implementation plans by 12 May. However, the regulator said it will be “pragmatic” and will not require firms to communicate to customers as required by the scheme timetable.

Contingency planning

Looking ahead, the FCA says it has not yet decided what action to take depending on the possible scenarios arising from the legal challenge. If the scheme, or parts of it, were quashed by the Tribunal’s decision, then potential options could include proceeding with a revised scheme. This would likely require further consultation, and any resulting rules or guidance could face further lengthy challenge.

When it began considering a consultation on an industry-wide scheme, in January 2024, the FCA took the unprecedented step of pausing complaints.

As complaints cannot be paused indefinitely, the FCA said that 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 says lenders need to ensure that from mid-November 2026 they can deal with complaints within the statutory timeframe.  Firms 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. 

The FCA stated: “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.”

Grounds for the challenge

The FCA said 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 regulator reported.

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.    

The aspects being challenged include the application of the rules to agreements entered into before 1 April 2014;  the FCA’s application of the law relating to limitation periods; issues around the existence of an “unfair relationship”; the method of calculation of redress; the FCA’s power to make the rules, and its application of its statutory objective of protecting and enhancing the integrity of the UK financial system; and alleged unlawful interference with lenders’ property rights under the Human Rights Act.

Finance Connect’s UK Summer Conference on 4 June will have a full briefing on the latest developments surrounding the FCA redress scheme, including next steps for lenders and in-depth analysis from Wayne Gibbard, partner at Shoosmiths and legal adviser to Finance Connect.

Find out more about the Finance Connect UK Summer Conference here.

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