Captives to fight FCA redress scheme

The financial services arms of Mercedes-Benz and Volkswagen are to challenge the Financial Conduct Authority’s (FCA’s) auto finance redress scheme, joining campaigning group Consumer Voice and one other as yet unnamed lender in taking legal action over the compensation plans.

In its Q1 2026 results, Mercedes-Benz provided an update on significant changes to legal proceedings affecting the group’s subsidiaries.

This stated that large number of customers who entered into finance agreements with Mercedes-Benz Financial Services UK Limited (MBFS UK) have raised out-of-court complaints for damages and/or filed court claims against MBFS UK for damages.

In its analysis of the FCA redress scheme, which is divided into two elements, one for agreements beginning between 6 April 2007 – 31 March 2014 and a second scheme for agreements beginning between 1 April 2014 – 1 November 2024, the company noted that “both schemes continue to presume a business relationship detrimental (unfair) to the customer in the case of a DCA, high charges for credit or where the broker is commercially tied.”

It went on to state: “In comparison to the draft for a respective scheme published by the FCA in October 2025, the threshold for high charges has been increased. Furthermore, the FCA has identified that commercial ties would not be deemed unfair if there were clear and visible links for the customer between the lender and manufacturer. However, the FCA has increased the minimum rate of interest to be applied to 3% and updated its calculation methods for redress. Mercedes-Benz Group has appealed the schemes.”

Volkswagen Financial Services indicated to the Financial Times that it was also planning a legal challenge as the company had “identified issues that require independent clarification,” and wanted to ensure the scheme was applied “accurately and fairly.”

In a statement to City AM, the FCA confirmed it had “received challenges from three lenders in addition to the challenge from Consumer Voice, represented by Courmacs Legal.” The identify of the third lender is not publicly known.

Consumer Voice announced its decision to take the FCA to the Upper Tribunal last week, arguing that the FCA’s standardised methodology for calculating compensation payments disadvantaged consumers as it did not reflect their actual financial loss in many cases.

Leading UK auto finance lenders, including Lloyds Bank, Barclays, Santander and Close Brothers, along with the Finance & Leasing Association, have all made clear that they will not be taking court action over the FCA’s scheme, which is expected lead to pay outs totalling some £9.1 billion and is due to begin later this summer.

FCA response

Responding to the news of legal challenges, the FCA said: “Our scheme is the quickest, fairest and most efficient way to compensate consumers. It is disappointing that some have decided to challenge it and delay consumers getting their money back, when for many the payouts would be very welcome this year as they face rising household bills. This also prolongs the uncertainty for all involved, which is not good for investment or a healthy motor finance market. 

“We are considering our approach and will set out more later this week.”

The regulator has also issued a specific statement to claims management companies (CMCs) and law firms who are acting for consumers with auto finance misselling claims, pointing out that: “We’ve no vested interest in setting up a motor finance redress scheme.”

“Any law firm or CMC involved in a potential challenge against the scheme that also has clients making motor finance claims should consider their position and that of their clients carefully.

“At the very least, they should write to those clients to explain they’re involved in a challenge that’s likely to delay compensation.

“They should give those clients the option of exiting the contract and strongly consider waiving any fees.

“Our scheme will put £7.5 billion back in people’s pockets. Some have already waited over 2 years for a response to their complaint. With pressure on household bills rising, they shouldn’t be made to wait longer.

“Over 12 million agreements made between 2007 and 2024 are eligible for compensation under the scheme. Our analysis shows millions of those did not involve the particularly serious misconduct identified in the case considered by the Supreme Court,” the FCA statement added.

The regulator said that its estimate indicates the cost of dealing with complaints would be over £6 billion more without a scheme.

Captive costs

Manufacturer captives are on the hook for about 42%, or £3.8 billion of the FCA’s total compensation estimate, according to a report by investment bank RBC Capital Markets.

Its analysts estimate that, altogether, captives have set aside £803 million, leaving a shortfall of about £3 billion. In contrast, Lloyds, Santander and Barclays are expected to shoulder 57% of the total bill and appear to be better prepared, having already set aside £3.9 billion of the £5.2 billion they are likely to face.