FCA brands scheme challenges “absurd”

The Financial Conduct Authority (FCA) has described arguments from the three lenders challenging its motor finance redress proposals as “absurd” in its submission to the Upper Tribunal, claiming the firms’ view that they themselves should assess whether and how much compensation is due for damage to consumers would be tantamount to agreeing to “let the foxes guard the henhouse.”

Much of the arguments put forward by the lenders and a fourth challenger, the consumer group Consumer Voice, centre on the application of section 404 of the Financial Services and Markets Act 2000 (FSMA) in relation to the design of the consumer redress scheme (CRS) which the FCA has split into two parts, one covering historic agreements up to 2014 and the other agreements since that date.

In a robust defence to the legal challenge from the lenders (Mercedes-Benz FS, Volkswagen FS, Credit Agricole Auto Finance) the FCA stated: “These submissions apparently proceed on the basis that ss.404(6) and 404A(1)(c) empower firms which are subject to a CRS to make their own decisions about whether or not their conduct caused loss or damage to consumers, and that that is a matter for them with which the FCA cannot interfere. That is plainly wrong.”

The regulator went on to argue that “The whole point of the s.404 power to introduce a CRS is the ability to impose rules on firms which are responsible for widespread failures, requiring those firms to investigate the failures and make redress according to those rules.

“The FCA makes the rules, and the firms have to follow them. Section 404 does not confer any powers on the firms. Nothing in the statutory language indicates an intention of Parliament to let the foxes guard the henhouse.”

Key objections

The FCA’s submission groups the contested elements put forward in the three lenders’ submissions under eight headings, while a ninth heading covers a specific objection to Consumer Voice’s involvement.

The nine issues identified are: 

1. Temporal scope, particularly in relation to motor finance agreements entered into before 1 April 2014 
2. The definition and interpretation of unfair relationships
3. The interpretation of the statutory threshold that: “consumers have suffered (or may suffer) loss or damage…under s.404; FSMA”
4. The schemes’ rules as to redress
5. The approach to limitation in the schemes’ rules
6. The approach to the “market integrity objective” (s.1D FSMA) and/or to consumer protection
7. The FCA’s approach to the rate of compensatory interest
8. The alleged incompatibility of the schemes with property rights under the Human Rights Act
9. Whether Consumer Voice should be refused permission to apply, for a lack of sufficient interest, and/or a lack of candour

In many cases, the FCA seeks to dismisses the lenders’ arguments claiming they are based on an unlawful and/or irrational approach to the workings of s.404.

For example, in the instance of the challenge around the first scheme, which covers agreements made between 2007 and 2014, the FCA states: “Were the lender Applicants to be correct, there would be an unjustifiable lacuna in enforcement”, since neither the OFT (which was abolished on 1 April 2014) nor the FCA (to which the relevant functions were transferred) could take steps to procure redress.

 The regulator argues this is wrong since “the relevant powers plainly encompass ‘historic’ failures and express provision is made for the specific purpose of avoiding such lacunae.”

The FCA states that it was entitled to conclude that the threshold for introducing a CRS in s.404(1)(b) was met and that “none of the lenders have identified any aspect of this part of the Scheme rules which is outside the FCA’s statutory powers to introduce them.”

Outcomes

The FCA submission does concede that an industry-wide scheme may not produce the same result for each consumer as a redress approach adopted by each individual lender when it states: “The FCA’s (eminently reasonable) policy decision to adopt a universalised solution over an individualised one which must be determined from scratch in every case inevitably entails a degree of imprecision in securing the outcome which would be appropriate in a given case.

However, it defends its approach by going on to state: “This is so regardless of what the ideal solution would be: it is inherent in the nature of a broad-brush approach, involving the adoption of bright-line rules, that it may be both over- and under-inclusive in some cases. It does not follow that the broad-brush approach is irrational or otherwise unlawful.”

As regards specific elements of the scheme design, for example the FCA maintains that “much of the criticism of the APR adjustments applied to the calculation of the just redress amount are in substance a challenge to the very concept of applying a flat rate at all”, adding that “as to ‘outcomes’, the thrust of the allegation appears to be that unfairness can only arise if inadequate disclosure results in lenders making abnormal profits or consumers paying above-market price.”

Consumer Voice

As well as three captives, the Upper Tribunal case includes a submission from Consumer Voice, a group which represents consumers’ views.

The FCA is highly critical of the organisation’s challenge which it claims “carries with it a distinct air of unreality”, stating: “The very purpose of the Schemes, and the s.404 power, is to create a mandatory CRS for consumers so as to provide them with a straightforward, simple, free and clear opportunity to obtain redress for what the FCA considers to be widespread market unfairness, which they would not otherwise have.

“The existence of the Schemes obviates the need for consumers within their scope to make complaints to the FOS or take the risk of bringing legal proceedings.”

On this basis, the regulator describes Consumer Voice’s arguments as “legally and factually incoherent” and questioned its standing as an organisation protecting consumer interests commenting “It is notable that no designated consumer bodies, or indeed any other body purporting to represent consumers or the public interest, have chosen to bring an application.”

Timings

The Upper Tribunal has said it will hear the applications either for 5 days commencing 14 December 2026 or 9 days commencing 16 February 2027. The date chosen will depend on the outcome of a final case management hearing scheduled for 5 and 6 October 2026.

Read the statements of grounds of objection from:

• Volkswagen FS
• Mercedes-Benz FS
• CA Auto Finance
• Consumer Voice