Prof. Dr. Henry Allen Blair, Senior Counsel, Head of Commercial, and Barrister at MILS Legal on the motor finance redress scheme, the legal challenges, and what dealers need to understand now.
The motor finance redress scheme was meant to be the route out of uncertainty. Well, what did Steinbeck — or Burns, if you want to be pedantic about it — say about best laid schemes?
The fact that the scheme is stuck in the mud, however, doesn’t mean dealers can ignore it. And it certainly doesn’t mean the wider motor finance issue has gone away. Unfortunately, what it means is far more awkward: dealers, lenders, brokers, claims companies, and consumers now have to prepare for at least two possible futures at once.
The first is the one the FCA wants — an industry-wide scheme, standardised, structured, and operated by lenders in accord with a single methodology. The second is the fallback: if the scheme, or critical parts of it, get quashed, the market reverts to a complaint-led approach, with lenders, the Financial Ombudsman Service, and the courts applying the underlying judgments without a ready-made FCA redress framework.
Both futures have their upsides and downsides. The scheme delivers speed at the cost of nuance. Every consumer gets processed under the same rough rule, regardless of whether their facts are stronger or weaker than the rule’s typical case. The fallback restores the nuance — and then collects the bill one complaint, one Ombudsman referral, and one court claim at a time.
For dealers, the practical message remains that firms should continue to identify relevant complaints and agreements, gather data on commission arrangements and disclosure practices, and obtain information held by brokers. And so that it doesn’t get lost, the looming overhang of indemnities in lender contracts remains a concern for dealers.
Quick recap
The scheme covers motor finance agreements entered into between 6 April 2007 and 1 November 2024, divided by reference to 1 April 2014 — the date the FCA assumed consumer credit regulation from the Office of Fair Trading. The split is more than tidiness. If a challenge knocks out the pre-2014 portion, the post-2014 portion can survive, and vice versa. Implementation runs to 30 June 2026 for post-1 April 2014 agreements and 31 August 2026 for the earlier cohort, though the machinery hanging off those dates is now on a soft pause. The FCA confirmed on 8 May 2026 that it will not enforce the customer-communication elements while the challenges are pending, and the 12 May attestation deadline has been relaxed. Preparation continues. Performance does not.
Office of Fair Trading. The split is more than tidiness. If a challenge knocks out the pre-2014 portion, the post-2014 portion can survive, and vice versa. Implementation runs to 30 June 2026 for post-1 April 2014 agreements and 31 August 2026 for the earlier cohort, though the machinery hanging off those dates is now on a soft pause. The FCA confirmed on 8 May 2026 that it will not enforce the customer-communication elements while the challenges are pending, and the 12 May attestation deadline has been relaxed. Preparation continues. Performance does not.
Calculating redress
The redress methodology is one of the most important parts of the scheme. It is also one of the principal battlegrounds in the challenges.
The FCA has not simply said: “refund all commission in every case”. That matters. The most serious cases — those that lie closest to the territory of the Supreme Court’s reasoning in Johnson v FirstRand — produce commission paid plus interest. The FCA’s published test for this category is commission of at least 50% of the total cost of credit and at least 22.5% of the loan, combined with another relevant factor of unfairness.
For other unfair-relationship cases, the FCA uses a hybrid: the average of estimated loss and commission paid, plus interest. Estimated loss derives from an APR adjustment of 17% for agreements from 1 April 2014, and 21% for earlier ones, the higher figure reflecting the FCA’s view that earlier arrangements involved greater harm. In around one in three hybrid cases, payment is capped at the lowest of 90% of commission plus interest, the adjusted realised total cost of credit, or the realised cost on a simpler basis. The cap aims to avoid placing consumers in a better position than fair disclosure would have produced.
Compensatory interest follows a deliberately modest formula. It is simple interest at the annual average Bank of England base rate plus 1%, with a floor of 3% in any year. That is some distance from the 8% per annum that consumer-side commentators had pushed for, and it is one of the methodological choices the challengers attack directly.
The FCA estimates the average redress payment per agreement at around £830, with total consumer redress at approximately £7.5bn out of an industry-wide cost of around £9.1bn. Twelve point one million agreements are within scope, and the FCA models a 75% claim rate.
That is the basic bargain. Consumers get a free, standardised, and relatively accessible route to compensation. Firms get structure, finality, and a methodology that does not require litigating every case as a miniature trial. Neither side gets everything it wants.
The challenges
The FCA has received four legal challenges. One is from Consumer Voice, a limited company represented by Courmacs Legal. The other three come from lenders: Volkswagen Financial Services, Mercedes-Benz Financial Services, and Crédit Agricole Auto Finance. Importantly, as the FCA has not been shy in pointing out, none of the claims is expressly in the name of an individual consumer.
Not surprisingly, given the parties, the challenges do not all pull in the same direction. The FCA itself characterises them as attacking the scheme, in effect, from both sides — as unduly favourable to consumers and as unduly favourable to lenders.
For anyone who doesn’t regularly watch regulatory challenges, this is an unusual mess. Most of the time, a scheme like this faces challenges from one direction or the other, not both.
Five threads run through the published grounds of challenge. The first is vires. Did the FCA have the power to make these rules at all, and did it properly identify consumer losses in deciding that it did?
The second is the pre-2014 scheme, the application of which is challenged as a discrete issue in its own right.
The third is limitation. The challengers attack the FCA’s approach to the law on limitation, including whether consumers have, as a matter of law, suffered loss or damage for which compensation is payable.
The fourth is the scheme’s chain of presumptions. Under the rules, where a relevant arrangement was not adequately disclosed, the lender must presume an unfair relationship within section 140A of the Consumer Credit Act 1974. The scheme then presumes that the unfair relationship caused the consumer loss. Both presumptions are now live issues for the Tribunal.
The fifth is the redress methodology itself: the APR adjustments, the compensatory interest rate, and the FCA’s treatment of consumers’ actual losses. To make things more confusing, there’s also an added argument that the FCA has misapplied its statutory objective of protecting and enhancing the integrity of the UK financial system, and a separate complaint that the rules unlawfully interfere with lenders’ property rights — the property-rights argument resting on Article 1 of Protocol 1 to the European Convention on Human Rights, as given effect by the Human Rights Act 1998.
So, this is not a small procedural skirmish. One party or another has pretty much challenged, one place or another, every part of the scheme: legal foundations, scope, presumptions, and arithmetic.
What happens next
The FCA will not require firms to communicate with customers in accordance with the scheme timetable inaccurate.
The FCA is also discussing with the Tribunal and the applicants whether some elements of the scheme can be suspended. For now, however, the FCA’s position is clear enough: firms should keep preparing unless and until the FCA says otherwise.
That also makes sense. The work of identifying agreements, locating records, mapping lender relationships, and reconstructing historic disclosure practices does not become wasted because the scheme is under challenge. In a no-scheme world, that work becomes more important, not less.
In any event, the hearing on all of this is unlikely before October 2026. Until then, the industry is in a holding pattern, not on a holiday.
The no-scheme scenario
The FCA’s most important message may also be the least comforting. Complaints cannot be paused indefinitely. If the scheme, or parts of it, are quashed, the regulator says it will need to consider its options, including whether to proceed with a revised scheme. A revised scheme would require further consultation, and any new rules could attract further challenge.
For planning purposes, the FCA is supervising lenders against a central assumption that, if the scheme fails, there will be no scheme. Under that assumption, lenders must be operationally and financially ready for a complaint-led, supervision-driven approach to historic liabilities. The FCA has told lenders to prepare on a precautionary basis for a Tribunal decision around mid-November 2026, and to be ready from then to handle complaints within the usual statutory timeframes.
A successful challenge does not make the underlying issue disappear. It removes the standardised machinery for resolving it. The realistic consequence is more complaint handling, more Ombudsman involvement, more litigation, more argument about methodology, and more cost — borne, ultimately, by the same lenders, the same brokers, and the same dealers.
For dealers, the no-scheme scenario is not necessarily kinder. It would likely mean less predictable lender requests, more case-by-case evidence gathering, and more pressure to reconstruct historic practice from imperfect records. If the scheme survives, dealers need their records. If the scheme fails, dealers need their records. In either world, indemnities also remain a worry.
The scheme now sits between policy and litigation. Consumer-side challengers say it undercompensates. Lender-side challengers say it goes too far, or rests on unlawful foundations. The Upper Tribunal will resolve issues going to scope, legality, and mechanics. Until then, sober preparation is the best response. The regulatory fog is thick, but the practical instruction is not: find the records, map the arrangements, control the communications, and resist the assumption that uncertainty is the same thing as safety.
