UK car finance lenders challenge FCA redress scheme over compensation liability

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UK car finance FCA challenge

Highlights

Volkswagen Financial Services and Crédit Agricole are legally challenging the FCA's authority to impose a car finance redress scheme over undisclosed commissions, delaying expected 2024 consumer payouts.
The FCA estimates its compensation scheme for undisclosed car loan commissions could result in £7.5 billion in payouts, 12 million affected loans, and £1.6 billion in additional sector costs.
FCA chief executive Nikhil Rathi warns that industry court victories could add £6 billion in operational costs and significantly delay consumer redress beyond current expectations.

Court challenge tests regulator's redress powers

As reported by Financial Times, the FCA says in a legal defence filed with the Upper Tribunal in London that lenders opposing its proposed car finance redress scheme are advancing arguments that would improperly limit the watchdog's authority. The filing, made public on Wednesday, says the position taken by lenders including Volkswagen Financial Services and Crédit Agricole would effectively allow firms to determine their own liability for compensation linked to hidden commissions on car loans.

The regulator describes that interpretation of its powers as "absurd". In the filing, the FCA says Parliament did not intend to give companies such discretion, arguing that firms must follow the rules set by the watchdog rather than decide for themselves when redress is owed.

The case centres on the FCA's plan for an industry-wide compensation scheme tied to undisclosed commissions paid to dealerships when customers took out motor finance. VW and Crédit Agricole argue the proposal unlawfully assumes that most affected customers suffered financial loss if commissions were not clearly disclosed, and say losses should instead be assessed individually.

Lawyers for Crédit Agricole say the scheme would presume unfairness and loss without evidence, then require redress to be paid to customers deemed to have suffered harm without proper foundation. The legal challenge has already pushed back payouts that were expected to begin this year until after court hearings due in December or February.

Consumer payouts and sector costs at stake

The FCA is also facing a separate challenge from Consumer Voice, which argues that the regulator's scheme leaves victims short by £4.6 billion. The group says the official approach is unfair, worsens consumer harm, undermines the FCA's consumer protection objective and fails to hold lenders properly accountable.

The watchdog rejects that criticism and questions Consumer Voice's status and motives in its legal submissions. Lawyers acting for the FCA say the organisation is more accurately described as a for-profit business offering services to consumers and therefore has commercial incentives of its own.

Consumer Voice responds on Wednesday that it is disgraceful for a public body to include allegations in legal pleadings after being repeatedly told they are untrue. The broader compensation programme remains one of the FCA's largest potential redress exercises, with the regulator previously estimating about £7.5 billion in payouts covering more than 12 million car loans made between 2007 and 2024, plus a further £1.6 billion in costs.

FCA chief executive Nikhil Rathi has previously warned lenders that if the court challenges force the regulator to abandon the scheme, the industry could face an additional £6 billion in operating costs and a much longer compensation process.

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