Legal challenges force partial suspension of FCA redress scheme

The Financial Conduct Authority (FCA) has been forced to partially suspend its motor finance redress scheme pending legal challenges from three captive lenders and a consumer action group, which are not now due to be heard until the end of this year at the earliest.

The Upper Tribunal has made an order suspending parts of the scheme, and has confirmed it will hear the legal challenges on 14 to 18 December 2026 or 16 to 26 February 2027.

The final dates depend on whether any of those involved in the case apply for further expert opinion or disclosure of information, and whether any such application is successful.

The three lenders – VW Financial Services, Mercedes Benz Financial Services and Crédit Agricole Auto Finance – are essentially arguing that the planned industry-wide redress scheme as designed imposes obligations the regulator does not have authority to impose, or that the redress methodology over-corrects the compensation due to consumers.

The fourth complainant is Consumer Voice, represented by Courmacs Legal, which takes the opposite view, arguing that the FCA scheme is unduly favourable to lenders and that its methodology under-compensates affected consumes and excludes some who should be eligible.

The FCA said the partial suspension “enables firms to keep preparing for the scheme and progress complaints as far as possible, while avoiding work that may need to be repeated if the challenges succeed. It also provides certainty for some consumers sooner, by requiring firms to tell complainants who are not owed compensation, subject to limited exceptions.”

What happens next?

The partial suspension confirms that firms are not required to calculate or pay redress, or send communications about compensation owed under the scheme, in line with the scheme timetable until the Upper Tribunal process concludes.

Firms must comply with all rules which are not suspended (PDF). This includes continuing to:  

• Identify relevant complaints and agreements.
• Gather the data needed to identify commission arrangements and disclosure practices, including where information is held by brokers.
• Respond to complainants who are not owed compensation under the scheme by the relevant scheme deadlines, except where:
  • The firm considers the complaint was out of time when the scheme was made.  
  • The complaint involves a contractual tie and the firm is relying on the ‘captive lender’ exception to conclude that no unfair feature was present.  

Firms must also:

• Tell complainants the outcome of any non-scheme aspects of a mixed complaint, where the complaint covers matters both within and outside the scheme and the firm says they are not owed compensation for the scheme aspects.
• For brokers, provide lenders with requested documents or information, or confirm they do not hold them, within one month of the request.
• Work with claims companies to resolve instances where consumers are represented by more than one party.  
• Cooperate fully and promptly with the Financial Ombudsman Service on any existing complaints that have been referred to it.

This includes complainants whose cases are outside the scope of the scheme and complainants whose cases are within scope but do not have any of the three unfair features required for compensation: a discretionary commission arrangement, a high commission arrangement, or a tied arrangement.

Communication

The FCA has made clear that if a firm needs more time to tell consumers they are not owed compensation under the scheme, the regulator will not treat it as non-compliant or take enforcement action so long as they tell consumers within seven weeks of the relevant scheme deadline (PDF).

The regulator says it expects all lenders to keep complainants up to date on the latest developments, and will be providing further resources to help with this and will also publish copies of the legal applications, pleadings and directions made by the Tribunal on the FCA website.

The FCA notes that: “In particular, we expect the three lenders who have challenged the scheme, at a minimum, to contact all of their complainants individually and directly to explain they have issued a legal challenge and the resulting partial suspension to the scheme and delay to compensation payments.”

Contingency planning

The Finance & Leasing Association (FLA) welcomed the Upper Tribunal’s decision, saying: “Although the partial suspension means compensation payments cannot begin until the legal process has concluded, it provides greater certainty for firms and consumers, avoids work that may need to be repeated if the challenges succeed, and allows the legal issues to be resolved before the scheme is fully implemented.”

Firms are urged to continue preparing for the scheme and meeting the requirements that remain in force, while the Tribunal considers the appeals. However, while when it launched the redress scheme in March this year, the FCA said it expected some payments to be made in 2026, it is now clear that the legal challenges mean any compensation due will not be paid before 2027 at the earliest.

As regards the final outcome, the FCA maintains that “our scheme is the quickest, fairest and most efficient way to compensate consumers and we will defend it robustly”, and warns lenders that they need to be operationally and financially ready for a complaint-led and supervisory approach to resolve historical liabilities, in line with the default statutory timelines.

However, the regulator has conceded that depending on the Upper Tribunal’s findings, the scheme may need to be adapted, which might require a further consultation process, or could even be overturned, in which case lenders would be required to address claims on an individual basis through the courts.

Other legal developments are increasing the pressure on the timeframe for an industry-wide redress scheme.  A recent Court of Appeal ruling has potentially opened the way for thousands of motor finance misselling claims to be dealt with under multi-complaint “omnibus” group actions, which could see lenders facing large-scale mass litigation.