Millions of car finance payouts are now uncertain after the UK’s financial watchdog acknowledged that its compensation scheme faces significant delays, possible changes, or even total collapse, as four separate legal challenges threaten to derail the entire process.
The Financial Conduct Authority (FCA) has told motor finance firms to prepare for the possibility that its redress scheme – which could see an average payout of £829 per eligible agreement – may not go ahead as planned. While the regulator insists it will defend the scheme “robustly”, it has also warned lenders to plan for a scenario in which “there would be no scheme”.
The uncertainty stems from legal action brought by Volkswagen Financial Services, Mercedes-Benz Financial Services, Crédit Agricole Auto Finance, and a consumer group called Consumer Voice (represented by Courmacs Legal). All four are asking the courts to quash the FCA’s compensation framework, arguing that the rules are unlawful. The regulator has described the challenges as claiming, “in effect, that the FCA’s approach to establishing the schemes has been both unduly favourable to consumers and unduly favourable to lenders”. At least one claim alleges that the FCA has breached lenders’ rights under the Human Rights Act 1998.
Background to the scandal
The motor finance scandal centres on “discretionary commission arrangements” (DCAs), which were common between April 2007 and January 2021. Under these deals, car dealers were allowed to set the interest rate on finance agreements, and the higher the rate, the bigger the commission they received – in some cases up to 39% of the total cost of credit. This created a clear incentive for dealers to push customers into more expensive loans, often without transparency. The issue gained prominence after a Supreme Court ruling in August 2025, which found that hidden commission payments created “unfair relationships”.
In response, the FCA set up an industry-wide redress scheme, publishing final details in March 2026. The scheme was designed to compensate motor finance customers treated unfairly between 2007 and November 2024. Initially, around 14.2 million motorists were thought to be eligible, but that figure was later revised down to approximately 12.1 million agreements. The total estimated cost to the industry is around £9.1 billion, with roughly £7.5 billion earmarked for consumer payouts. Compensation is calculated based on the commission paid and an estimate of the financial loss, including interest; in the most serious cases consumers could receive all commission back plus interest, though payouts will be capped in about one in three cases to ensure nobody ends up better off than if they had been treated fairly. Very small commissions and 0% APR loans are excluded from the scheme.
The four legal challenges
Consumer Voice argues that the scheme undercompensates drivers and prioritises lenders’ interests over consumer protection, potentially leaving millions out of pocket by hundreds of pounds per claim. On the other side, Volkswagen Financial Services, Mercedes-Benz Financial Services and Crédit Agricole Auto Finance contend that the scheme is unduly favourable to consumers and therefore unlawful. The FCA has acknowledged that the cases raise fundamental questions about limitation periods, including whether consumers have suffered loss or damage sufficient to trigger compensation.
The watchdog has said that while a hearing date is unclear, these cases are unlikely to be heard before October, with potential rulings expected in mid-November. In the meantime, the FCA is in discussions about “the possibility of suspending some elements” of its compensation scheme, while still urging lenders to prepare for payouts. Should parts of the scheme be quashed by the courts, the regulator is considering its options – including proceeding with a revised version, which could face further challenges, or asking lenders to plan for a scenario where there would be no scheme at all. In that case, lenders might need to respond to customer complaints individually rather than under an industry-wide programme, which could lead to a fragmented and lengthy process and potentially leave some affected motorists never receiving compensation.
“Many people will be frustrated that the legal action will delay payouts due to begin this year,” the FCA said. “We remain committed to ensuring consumers receive any compensation owed as promptly as possible.”
The financial fallout is already being felt. One independent lender, Blue Motor Finance, is reported to be on the verge of administration due to the protracted legal uncertainty. Major lenders including Lloyds Banking Group, Santander and Barclays have confirmed they will not challenge the scheme, accepting the FCA’s amended plan and setting aside provisions. They favour “timely compensation for consumers”.
What consumers should do now
Despite the uncertainty, the FCA continues to advise consumers to complain directly to their lender if they believe they may be owed compensation. This can be done for free using a template letter available on the FCA’s website. Submitting a complaint now, the regulator says, is important to ensure cases are considered and may lead to receiving compensation sooner. The scheme was initially expected to pay out the vast majority of claims by the end of 2027, with specific deadlines set for 30 June 2026 for loans taken out from April 2014, and 31 August 2026 for older agreements. Those timelines are now in serious doubt.
