Mercedes-Benz is spearheading a legal challenge against the Financial Conduct Authority’s compensation scheme for motorists mis-sold car loans, alongside two other lenders and a consumer group that argues the redress system pays too little.
The German carmaker, which has set aside approximately £400 million in provisions to cover potential costs, confirmed it has appealed against the watchdog’s proposed redress programme. Volkswagen Financial Services and Crédit Agricole are understood to be the other two lenders bringing challenges, according to reports. The deadline for companies to lodge legal challenges passed on Monday 27 April.
A spokeswoman for Mercedes-Benz said: “Given that this is subject to ongoing legal proceedings, we cannot comment further.” Volkswagen Financial Services stated it sought “independent clarification” to ensure the scheme is applied “accurately and fairly”. The FCA confirmed it had received challenges from three lenders and from Consumer Voice, represented by Courmacs Legal, adding: “We are considering our approach and will set out more later this week.”
The FCA’s redress scheme: scope, cost and timeline
The FCA’s compensation programme is designed to cover motor finance agreements entered into between 6 April 2007 and 1 November 2024. The watchdog estimates that 12.1 million agreements are eligible, with total payouts expected to reach around £7.5 billion. When administration costs are included, the overall cost to firms is estimated at roughly £9.1 billion. The average payout per claim is put at approximately £829 to £830.
The scheme stems from a widespread mis-selling scandal centred on undisclosed commission arrangements, particularly Discretionary Commission Arrangements (DCAs). Under such arrangements, dealers and brokers could increase interest rates on car loans to earn higher commissions without fully informing customers, creating an incentive to prioritise their own financial gain over the borrower’s best interests.
The redress programme is split into two parts. Scheme 1 covers agreements from 6 April 2007 to 31 March 2014; Scheme 2 covers those from 1 April 2014 to 1 November 2024. Firms have been given implementation deadlines: 30 June 2026 for Scheme 2 agreements and 31 August 2026 for Scheme 1 agreements. Payouts are expected to begin in summer 2026, with the vast majority settled by the end of 2027. Consumers who have not yet complained will be contacted by lenders, with a final deadline for claims for those not contacted by 31 August 2027.
The FCA has maintained that its scheme represents the “quickest, fairest way” to deliver compensation and has warned that legal action risks delaying payments.
Industry acceptance and consumer group opposition
While Mercedes-Benz, Volkswagen Financial Services and Crédit Agricole are pressing ahead with challenges, the broader industry has largely stepped back. The Finance and Leasing Association (FLA), the trade body representing UK motor finance firms, said it had “concerns” about the programme but chose not to raise a challenge. Major lenders Santander, Barclays and Lloyds have also decided to accept the scheme as it stands, despite reservations about the proportionality of redress. Barclays has exited the motor finance market entirely, while Lloyds operates through its Black Horse brand.
On the opposite side, Consumer Voice has applied to the Upper Tribunal for a review of the scheme under section 404D of the Financial Services and Markets Act 2000 — the first time an FCA redress scheme has faced such a challenge. The consumer group supports the need for an industry-wide scheme but argues it should “fairly reflect” the harm drivers have suffered, with “properly calculated compensatory interest”.
Consumer Voice contends that the FCA’s approach to compensation, which relies on the Supreme Court judgment in Johnson v FirstRand, is too restrictive and could exclude many eligible consumers. It believes a higher compensatory interest rate — potentially 8% — should be applied, which could amount to billions more for consumers. The group warns that the current methodology could leave millions of consumers out of pocket by several hundred pounds per claim, and that the FCA has prioritised protecting lenders, potentially misunderstanding its market integrity objective while minimising consumer protection.
A survey commissioned by Consumer Voice found that only 22% of consumers trust lenders to follow FCA rules when calculating compensation. The FCA has also warned consumers about claims management companies (CMCs) charging fees of up to 30% of compensation, noting that the redress scheme is free to use and that consumers should complain directly to their lenders. A joint taskforce with other regulators has been established to address poor practices among claimant representatives.
The Upper Tribunal in London will now decide which challenges are admissible and when they will be heard, with the FCA set to provide further details on its approach later this week.
