FCA warns no motor finance redress before 2027

Legal challenges to the FCA’s motor finance redress scheme mean there is little chance compensation will be paid to consumers any earlier than next year, while abandoning the industry-wide framework could cost lenders over £6 billion more and take three years to resolve claims through a complaints-led approach, the regulator has warned.

In a letter responding to questions raised by the Treasury select committee, FCA chief executive Nikhil Rathi cautioned “any payouts are now increasingly unlikely before 2027”, and expressed disappointment in the actions of the four  commercial parties who have taken a case to the Tribunal  (three captives: Volkswagen FS; Mercedes-Benz FS; Crédit Agricole Auto Finance; along with campaigning group Consumer Voice).

The regulator does not expect the case to be heard before October 2026.  If the scheme is upheld, the FCA expects payments to begin in 2027.

“Some of these steps could face further legal challenge. In these circumstances, consumers would be unlikely to receive compensation under a revised scheme before the second half of 2027 or even early 2028; under a complaints led approach, many, though, could receive it within the 8-week statutory timetable,” he explained.

Lender readiness

The FCA is still discussing a request from the challengers that parts of the scheme are suspended, but has advised lenders to keep preparing, noting that “we are concerned that many are not as ready as we would expect”. This is despite the FCA having already received implementation plans from over 90 firms – over 95% of lenders subject to the scheme.

“They must hold enough capital in the UK and make proper provisions for possible liabilities. We will test this through supervision and take strong action, including business restrictions, if firms do not have the right financial resources in place,” Rathi warned.

He also said the FCA would welcome ideas from firms and consumer organisations on how, despite the legal challenges, firms who want to should be able to start paying fair redress now.

But Rathi warned that more uncertainty, extended timelines and greater delivery complexity mean the work could begin to resemble previous large-scale consumer redress exercises, such as PPI.

Costs of delay

Rathi said some lenders estimate the current delay is costing their firm alone £35 million – £40 million because, for example, they must keep delivery teams in place for longer and plan for a range of scenarios, while the industry wide figure for cost of delay is likely to be much higher.

The FCA estimate of a £ 6 billion-plus bill for lenders assumes a lower redress cost due to less take up by consumers, but significantly higher non-redress costs driven by additional costs from Financial Ombudsman Service (FOS) fees for complaints that run past eight weeks (£1.2bn), disputes over redress decisions (£2.9bn), fees to cover FOS’ scaling costs (£2.9bn), and modest court costs (£0.1bn). There would also be additional compensatory interest costs.

From January 2024 to March 2026, total costs for the FCA were £20.5 million: £11.4 million on FCA resource and £9.1 million for external support. These figures do not include the cost of the 2024 skilled person review of historic motor finance discretionary commission arrangement sales across 10 lenders, which lenders paid for, at about £12.5 million in total.

The regulator estimates the legal challenge will add about £2.7 million in costs to its own budget, although this is an early figure. There are currently over 80 staff involved across motor finance work, including on the response to the legal challenges.

If the legal challenge proves successful, without a scheme in place, FCA estimates suggest up to 19 million complaints would need to be handled individual, many of which would be referred to the FOS. By comparison, the FOS received 300,000 cases in total last year.

Rathi noted that “Such an increase in caseload would require a substantial expansion of capacity. The FOS has demonstrated in the past, particularly in handling large volumes of PPI complaints, that it can scale up. However, doing so comes with significant cost, predominantly borne by industry.”

CMCs

Rathi’s letter to MPs cited widespread concerns about poor conduct by many claims management companies (CMCs), law firms and lead generators, describing unwanted texts and emails as “a huge and growing problem”, and multiple examples of “serious and unacceptable harm” to consumers.

Concerns about market conduct and risk include “how overseas investors and complex offshore financing chains, intermediated through wholesale and sometimes unregulated funding markets, drive high-volume consumer claims,” he wrote.

Rathi argued that CMC activity raised the risk of fraud and scams, with consumers receiving texts that seemed to come from lenders but were from other sources. Pointing out that this adds to lender costs, he said the FCA had also had to divert resources to defend a judicial review of its decision to publicise its enforcement investigation into The Claims Protection Agency Ltd (TCPA), and also  diverted further resource for several weeks to deal with a threatened challenge to the announcement last week of and enforcement investigation into Consultation Claims Ltd.

Section 404

MPs were told that the motor finance experience also highlights some practical limitations of deploying section 404 in a legally contested environment, where a small number of challengers can significantly delay resolution even if the overwhelming majority of affected consumers and firms want to proceed promptly.

Rathi said there is a case for considering further reforms to make it possible for those consumers and firms who wish to proceed to full and final settlement under the auspices of a structured redress scheme to do so, whilst not impeding the legitimate rights of challenge for parties that wish to exercise those rights. 

“In light of the significant concerns about conduct by CMCs, law firms and associated parties (including those in the funding chain), where powers are not already available, consideration should also be given to section 404 style redress powers covering all such entities so they appropriately compensate consumers for any harm they have caused, “ he added.

In conclusion, Rathi argued the motor finance case raised a strategic question, namely whether the wider system is designed to deliver fast, fair and low-friction redress when things go wrong at scale.

“The answer should be a framework with clearer powers, fewer gaps between regimes, better controls on harmful claims activity and their funders and partners and less scope for delay, especially late in the process. We would also welcome continued dialogue on how legislative and regulatory frameworks keep pace with rapid change, including technological advances, and deliver swifter, more effective outcomes for consumers, trust and confidence in markets and support the economy and the UK’s long-term competitiveness,” he said.