UK car finance lenders challenge FCA compensation scheme in human rights dispute

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UK car finance FCA dispute

Highlights

Volkswagen Financial Services, Mercedes-Benz Financial Services, and Crédit Agricole are challenging the FCA’s compensation scheme before the Upper Tribunal, alleging unlawful refund calculations and human rights violations.
Lenders argue the FCA’s use of 17% or 21% annual interest reductions as proxies for consumer loss is flawed, unsupported by evidence, and could force disproportionate payouts.
Compensation to UK car finance consumers remains on hold pending the tribunal’s decision, which will determine both payout obligations for lenders and the scheme’s market timeline.

Tribunal challenge over redress design

As reported by Financial Times, Volkswagen Financial Services, Mercedes-Benz Financial Services and Crédit Agricole are challenging the FCA's proposed compensation scheme before the Upper Tribunal in London, arguing that the plan is unlawful and that its refund calculations are flawed.

Lawyers for Volkswagen's financing arm say the regulator's plan interferes with property rights under the European Convention on Human Rights. In written submissions, they argue that the percentage cuts used to estimate refunds, either 17% or 21% reductions in annual interest depending on when a loan was taken out, are not reasonable proxies for consumer loss and are not supported by evidence.

Volkswagen's legal team says it supports a consumer redress scheme for motor finance agreements but argues that any such scheme must be lawful. It says the FCA's specific approach is disproportionate and could force the lender to compensate consumers in situations where a court would not make the same award.

Mercedes-Benz Financial Services also argues that the FCA has acted beyond its legal powers and disputes the regulator's assumptions about loans issued by captive, or in-house, finance providers. Crédit Agricole's lawyers similarly say the method used to calculate redress has no rational connection to any actual loss and contains multiple flaws in how interest-rate adjustments are derived.

Consumer payouts remain on hold

The FCA is defending the scheme and says its plans strike a careful balance between the interests of consumers and lenders. The regulator says the framework is fair to consumers, proportionate for firms and remains the quickest, simplest and most efficient way to put matters right.

The case stems from commissions paid by lenders to dealerships when consumers borrowed money to buy cars, a practice that triggered litigation on behalf of borrowers and led to a UK Supreme Court ruling last year. The FCA then developed its redress scheme to address the fallout from that litigation.

Compensation payments are currently paused because of the court challenges. Consumer Voice, which helps people bring compensation claims, is also taking action against the regulator, but from the opposite direction, arguing that the FCA has been too generous to lenders in calculating refunds and interest owed to consumers.

The FCA has told the tribunal that Consumer Voice may lack sufficient interest to bring its case because it would neither pay nor receive redress under the scheme and has not properly explained its funding. The outcome of the proceedings is likely to shape both the eventual payout burden for lenders and the timeline for compensation across the UK car finance market.

Our earlier coverage of the FCA’s revised UK crypto regime explained how the regulator softened parts of its planned rulebook after industry feedback that the original proposals were too burdensome. We noted that the FCA lowered certain capital requirements for stablecoin issuers and crypto trading firms, with the new regime slated to take effect from October 2027, as it seeks to balance consumer protection with market growth.

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