The FCA faces legal challenges to its Motor Finance Redress Scheme: what is the latest?

Several legal challenges have been launched at the eleventh hour in relation to the Financial Conduct Authority's (FCA) Motor Finance Consumer Redress Scheme which was finalised in March. It is one of the largest redress programmes ever implemented in UK retail lending and, in its current form, is expected to return £7.5 billion to consumers across more than 12.1 million agreements.

The first iteration of the Redress Scheme generated significant concern across the industry, particularly in relation to its breadth, encompassing claims dating back to 2007, and its departure from the legal standards applicable at the time. A number of market participants, including the Finance and Leasing Association (FLA), openly raised the prospect of judicial review. However, as the deadline for bringing a challenge approached, several parties, including the FLA, announced that they would not pursue judicial review.

Nonetheless, at the eleventh hour it became apparent that the FCA would be facing proceedings on four fronts. The first challenge came from consumer rights group Consumer Voice, which announced that it had applied to the Upper Tribunal to challenge the way in which compensation is calculated under the Redress Scheme, citing concerns that millions of consumers could be adversely affected. Two days later, it was announced that Mercedes‑Benz Financial Services and Volkswagen Financial Services had joined one other lender, Crédit Agricole Auto Finance in submitting challenges to the Redress Scheme. This development was subsequently confirmed by the FCA, together with its intention to both defend the challenges robustly and engage with lenders and consumer groups at pace ahead of announcing next steps for the Redress Scheme.  It is understood that the challenges may be consolidated and the timing of the initial hearing expedited.

These challenges may delay the Redress Scheme's implementation, although we note that the legal threshold for successfully challenging the Redress Scheme is high and, even if successful, the prospects of fundamental change could well be limited.

What is the background to the Redress Scheme?

The Redress Scheme follows the Supreme Court’s decision in Hopcraft v Close Brothers Ltd; Johnson & Wrench v FirstRand Bank Ltd [2025] UKSC 33 (you can read our analysis of the judgment here), as well as the subsequent public consultation on the design of the scheme (CP25/27: Motor finance consumer redress scheme).

While the Supreme Court’s decision significantly narrowed the basis for secret‑commission claims - rejecting arguments that motor finance dealers owe fiduciary duties to customers and declining to endorse the Court of Appeal’s broad formulation of a “disinterested duty” - the Court did nevertheless find that one of the commission arrangements was unfair under section 140A of the Consumer Credit Act 1974 ("CCA").

The FCA’s Redress Scheme has been designed to identify and compensate consumers in comparable circumstances, ensuring redress where similar unfair relationships may have arisen in the motor finance market.

What is the scope and structure of the Redress Scheme?

The FCA has released their policy statement on the Redress Scheme, which contains key details to be considered when interpreting the rules of the scheme which we have not sought to exhaustively summarise here. Instead, we have provided a high-level summary of some of the key features of the Redress Scheme below:

The FCA has now divided the framework into separate periods:  

The first covers 6 April 2007 to 31 March 2014, when consumer credit was overseen by the Office of Fair Trading. To ensure fairness where data is limited, the FCA applies a 21% APR adjustment when estimating consumer loss and provides firms with a longer implementation period to accommodate the practical challenges of older documentation.

The second scheme covers 1 April 2014 to 1 November 2024, during which consumer credit was directly regulated by the FCA. Regulatory expectations were clearer and firms maintained better records. As a result, the FCA applies a lower 17% APR adjustment and expects a faster implementation timeline.

What falls in scope of the Redress Scheme?

The Redress Scheme applies to motor finance agreements involving the inadequate disclosure of certain commission or lender–broker arrangements.

Within this framework, a relationship will generally be presumed to be unfair (and therefore give rise to redress) where there has been inadequate disclosure of one or more of the following “Relevant Arrangements”:

1. a discretionary commission arrangement;
2. a high commission arrangement; 
3. a tied arrangement; and / or
4. any other arrangement between a lender and a credit broker under which the credit broker was incentivised (directly or indirectly) to introduce consumers wishing to enter into motor finance agreements to the lender.

The rationale behind the FCA’s approach is to define the scope of the Redress Scheme as broadly as possible, in order to capture a wide range of motor finance cases involving inadequate disclosure within a single framework. The intention is to provide greater clarity and consistency as to the types of arrangements that may give rise to a finding of unfairness.

If a consumer has a complaint relating to a motor finance agreement that does not involve one of these arrangements, they will be unable to obtain a determination of unfairness through the Financial Ombudsman Service (FOS). Instead, they will need to file their claim through the courts if they wish to pursue compensation.

What is excluded from the Redress Scheme?

There are certain scenarios where an agreement is treated as fair and therefore excluded from the scope of the Redress Scheme. This includes:

• Low‑value commissions with thresholds set at £120 for the earlier period and £150 for the later period.
• Agreements with a zero APR.
• Arrangements where a broker selected the minimum rate under a discretionary commission arrangement (earning no discretionary uplift) the agreement is considered fair.
• Captive or white‑label lender arrangements at franchised dealerships, where the commercial relationship between lender and broker is sufficiently clear from the branding and consumer context.

The Redress Scheme also contains a number of outright exclusions. Agreements will not be reconsidered where:

• The Financial Ombudsman Service or a court has already determined the complaint.
• The consumer has accepted a full and final settlement.
• The loan is a high‑value agreement sitting above the 99.5th percentile, except in the case of mobility‑adapted vehicles.

What is the implementation timeframe?

If implemented as planned, under the Redress Scheme, the FCA has set two implementation windows. Firms operating under Scheme 2 must complete implementation by 30 June 2026, while firms falling under Scheme 1 have until 31 August 2026.

For consumers who have already complained (or who complain before the implementation window closes), firms must tell them whether they are owed redress, and how much, within three months of the implementation period ending. The consumer then has one month to accept or challenge the offer. Once the amount is agreed, the firm must pay the redress within one month.

Consumers who have not complained will only be contacted if the firm (or an insolvency practitioner or debt purchaser) believes they are likely to be owed redress. These consumers must be contacted within six months of the end of the implementation period and will then have six months to opt in. After opting in, the firm must confirm whether compensation is due within three months, after which the consumer has one month to accept or dispute the offer. Payment must be made within one month once the redress amount is agreed.

The Redress Scheme aims to move quickly while giving consumers enough time to respond. The final deadline for all consumers to make a complaint is 31 August 2027. After this date, no further claims can be made.  As noted above, these deadlines may be impacted by the legal challenges noted above.

What is the potential impact of the legal challenges?

The ongoing legal challenges introduce uncertainty for both lenders and consumers. It has been reported that a hearing timetable has not yet been fixed, but proceedings could extend into 2027.

From a practical perspective, lenders face competing pressures of whether to:

• continue to invest in costly operational infrastructure for redress implementation and/or payouts in circumstances where this may need to be revisited; or

• pause implementation pending the outcome of the legal challenges or further announcement from the FCA on expected next steps, which reduces the time available for implementation (if the timelines above are not extended).

It is expected that the FCA will seek an expedited resolution of the proceedings together with industry engagement outlined above and, in the interim, address the impact on implementation deadlines in its upcoming announcement.  We will continue to follow developments.

To find out more about any of the issues mentioned in this article or for further details on the Redress Scheme, please contact Sonya Zywko.