The Financial Conduct Authority (FCA) has confirmed that legal challenges against its proposed car finance compensation scheme are likely to delay payouts for consumers affected by the ongoing car finance scandal [1].

Four separate legal challenges have been brought against the scheme [2], which was designed to provide a faster and more consistent route to compensation for consumers affected by historic commission arrangements linked to alleged car finance mis-selling and mis-sold car finance agreements.

The cases will be heard in the Upper Tribunal. However, the FCA has said it is unlikely that a hearing will be before October. Although the regulator is still determined to make sure consumers can get a fair refund as soon as possible, the legal action makes the situation even more uncertain for motorists waiting on a car finance refund or PCP refund.

Further delays for consumers

The FCA acknowledged the frustration many consumers are experiencing after waiting more than two years for clarity on potential car finance compensation.

The regulator said its industry wide scheme remains the quickest, fairest and most cost effective way to resolve large volumes of car finance claims and PCP claims. It also noted that most lenders remain committed to implementing the scheme and that it intends to defend the rules robustly.

However, legal proceedings mean compensation payments that were expected to begin during 2026 or payouts 2026 could now face further delays.

Lenders told to continue preparations

Despite the legal uncertainty, the FCA has instructed lenders to continue preparing for the scheme unless told otherwise.

The regulator said firms should continue:

• Identifying affected complaints and finance agreements
• Gathering commission and disclosure data
• Working with brokers where records are required
• Resolving cases where consumers have appointed more than one representative
• Cooperating fully and promptly with the Financial Ombudsman Service (FOS)

The FCA also asked lenders to submit implementation plans and continue preparing operationally for large scale compensation activity.

The regulator confirmed it will take a pragmatic approach while legal proceedings continue and will not currently require firms to send customer communications that were originally included in the scheme timetable.

Complaints outside the scheme should continue

The FCA also addressed complaints that contain issues beyond commission arrangements.

Where complaints contain both matters that fall within the proposed scheme and issues unrelated to motor finance commission, the regulator is considering whether firms should begin progressing the unrelated elements now.

Complaints that sit entirely outside the scope of the compensation scheme should continue to be handled through normal complaint procedures.

FCA begins contingency planning

One of the most significant developments is the FCA's contingency planning for a scenario where the compensation scheme is overturned.

The regulator said complaints cannot remain paused indefinitely and has now instructed lenders to prepare for a complaint led process if the scheme, or parts of it, are quashed by the Tribunal.

Under this alternative approach:

• Consumers would continue to submit a car finance claim directly to their lender
• The current complaints pause would end
• Lenders would be expected to respond within normal statutory complaint handling deadlines
• There would initially be no FCA prescribed redress formula
• The FCA and Financial Ombudsman Service would work closely together to manage complaint volumes

The regulator said lenders should prepare on a precautionary basis for mid November 2026 and ensure they are operationally and financially ready to handle large volumes of complaints.

The FCA also expects lenders to engage with auditors and make appropriate financial provisions for potential historic liabilities.

Could a new compensation scheme still emerge?

The FCA stressed that no decisions have yet been made regarding alternative outcomes.

Should the current scheme be declared invalid, the regulator said it would need to consider all options. This might involve formulating a new compensation scheme, but that could also require further consultation and might attract further legal challenge.

The FCA warned that a complaint led process would likely increase costs for lenders and may result in some consumers missing out if they never submit a complaint.

To address this, the regulator indicated it may use its supervisory powers to require firms to proactively contact affected customers who have not yet complained.

Key legal arguments being considered

The legal challenges raise questions about several aspects of the FCA's proposed rules.

These include:

• Whether the FCA has the legal authority to implement the compensation scheme
• The treatment of agreements entered into before April 2014
• How limitation periods should apply
• How liability and consumer losses should be assessed
• Whether lenders should be required to presume unfair relationships existed in certain circumstances
• How car finance compensation and redress should be calculated [3]
• Human rights concerns relating to lenders' property rights

The challenges affect all three categories covered by the scheme:

• Discretionary commission arrangements (DCAs)
• High commission arrangements
• Tied arrangements

Interestingly, the FCA noted that some applicants argue the scheme is too favourable to consumers, while others argue it is too favourable to lenders.

What does this mean for consumers?

For consumers affected by the ongoing FCA car finance investigation, the latest update means compensation is likely to take longer than originally expected.

However, the FCA has made clear that lenders should continue preparing for both the proposed compensation scheme and an alternative complaint handling process if the scheme does not proceed. The regulator has also stressed that complaints cannot remain paused indefinitely and has instructed firms to prepare for handling complaints from mid November 2026 under normal complaint handling rules if required.

Consumers who believe they may have been affected by car finance mis-selling or mis-sold car finance arrangements can still submit a car finance claim directly to their lender. This applies to motorists concerned about discretionary commission arrangements, high commission arrangements, tied arrangements, or other issues connected to the wider car finance scandal.

The FCA continues to encourage consumers to complain directly to lenders. While some people choose to use claims management companies or solicitors to help with car finance claims and PCP claims, consumers should carefully review any fees before signing an agreement.

Customers should not appoint more than one representative per car finance claim or PCP claim. The FCA has directly addressed the issue, indicating that lenders and representatives should actively work to find a solution where there is more than one party dealing with the same customer's case, as this will result in delays and unnecessary complications.

Anyone considering a car finance refund or PCP refund should keep copies of their finance agreements, correspondence and complaint records. Consumers may also wish to carry out a car finance refund check to understand whether they could potentially be affected by the ongoing investigation.

The FCA has also issued a further warning to consumers to be wary of PCP claim scams and cold calls offering guaranteed compensation. Compensation arrangements are the subject of continuing legal action and no business can guarantee the outcome of a particular case.

If consumers are unhappy with the service provided by a claims management company or law firm, they have the right to complain and, where appropriate, escalate their concerns to the Claims Management Ombudsman or Legal Ombudsman.

The FCA has stated that it remains committed to securing fair car finance compensation for affected consumers and will provide further updates as the legal challenges progress.

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References:

1. The Financial Conduct Authority (FCA) has confirmed that legal challenges against its proposed car finance compensation scheme are likely to delay payouts for consumers affected by the ongoing car finance scandal - https://www.fca.org.uk/news/statements/legal-challenges-motor-finance-compensation-scheme-update-firms-consumers
2. Four separate legal challenges have been brought against the scheme - https://consumervoice.uk/cars/fca-car-finance-compensation-challenge/
3. How car finance compensation and redress should be calculated - https://www.fca.org.uk/publications/policy-statements/ps26-3-motor-finance-consumer-redress-scheme