Three motor finance lenders have set out further objections to the Financial Conduct Authority's Motor Finance Compensation Scheme, arguing that the regulator's approach goes beyond what they believe is justified by the law.

Mercedes-Benz Financial Services, Volkswagen Financial Services and CA Auto Finance UK are challenging the scheme before the Upper Tribunal [1].

New legal filings provide further detail about their objections, including disagreements over how the FCA interpreted the Supreme Court's motor finance ruling, how it assessed consumer harm and the methodology behind its industry-wide approach.

The FCA strongly disputes the lenders' arguments and says it will robustly defend the scheme.

It maintains that the programme is the quickest, fairest and most efficient way to resolve millions of historic motor finance complaints and estimates that around £7.5 billion could ultimately be returned to consumers [2].

The competing arguments will now be considered through the Upper Tribunal proceedings.

Mercedes Questions FCA's Approach to Consumer Harm

Mercedes-Benz Financial Services has criticised what it describes as a "one-size-fits-all" approach to different parts of the motor finance market [3].

In its response to the FCA's legal defence, Mercedes argues that the regulator began from the conclusion that certain historic arrangements were harmful and then developed its reasoning around that position.

The lender also questions what it considers excessive reliance on the FCA's regulatory judgement when defending the scheme.

These are allegations forming part of Mercedes' legal challenge.

The Upper Tribunal has not found that the FCA worked backwards, misinterpreted the law or acted unlawfully in designing the scheme.

Volkswagen Disputes FCA's Interpretation of Redress

Volkswagen Financial Services has raised separate objections to the FCA car finance redress scheme approach.

One area of disagreement concerns the treatment of commission when compensation is calculated.

Volkswagen argues that because borrowers did not themselves directly pay the commission received by dealers or brokers, the commission should not simply be treated as money that can be "repaid" to the borrower [4].

It has also challenged the FCA's reliance on regulatory judgement in defending its interpretation of the law.

The FCA rejects that reasoning.

The regulator's compensation methodology does not simply assume that every commission payment should automatically be returned to every customer.

Eligibility and redress depend on the rules applying to the individual agreement, including the nature of the commission or commercial arrangement and whether the relevant unfairness and loss criteria are satisfied.

CA Auto Finance Challenges FCA's Use of Its Powers

CA Auto Finance UK, part of Crédit Agricole, is also challenging the regulator's approach [5].

Its arguments include disagreement over how the FCA has interpreted its powers when establishing the industry-wide scheme.

The lender has also objected to language used by the FCA when defending its position against the challenges.

As with the arguments from Mercedes and Volkswagen, CA Auto Finance's position has not been accepted or rejected by the Tribunal.

The legal proceedings are intended to determine whether the FCA's final rules fall within its powers and whether the regulator adopted a lawful approach when designing the scheme.

FCA Says Scheme Is the Fairest Way to Resolve Complaints

The FCA is defending its framework.

Responding to the latest lender arguments, the regulator said its scheme is intended to provide a faster and more efficient way of returning approximately £7.5 billion to consumers.

It has also expressed disappointment that the legal challenges have delayed compensation that had previously been expected to begin during 2026.

The FCA says it will respond fully to the lenders' arguments in court.

Its wider position is that an industry-wide programme provides greater consistency than requiring millions of motorists to pursue individual complaints through lenders and potentially the Financial Ombudsman Service.

The final scheme was also developed following consultation with consumer organisations, lenders and other interested parties.

What Did the Supreme Court Decide?

The dispute partly concerns how the FCA has responded to the Supreme Court's landmark motor finance judgment from August 2025 [6].

The Court rejected the argument that motor dealers generally owed the type of fiduciary duty that would automatically make undisclosed commissions unlawful.

However, it found that an unfair relationship existed in one of the cases before it under the Consumer Credit Act.

That judgment became an important part of the FCA's subsequent work on an industry-wide compensation framework.

The current lender challenges effectively ask the Upper Tribunal to consider whether the FCA has gone further than the law permits when translating those findings and its wider regulatory evidence into the final scheme.

The FCA says its approach is lawful.

How Does the FCA Scheme Work?

The Motor Finance Compensation Scheme covers certain agreements entered into between 6 April 2007 and 1 November 2024.

It addresses several types of historic arrangement that the FCA considers capable of creating unfair outcomes.

These include discretionary commission arrangements, certain excessive commissions and some undisclosed commercial ties between lenders and brokers or dealers.

Not every historic agreement qualifies.

A consumer does not automatically have a valid car finance claim simply because commission was involved in their agreement.

Likewise, having used PCP car finance during the relevant period does not automatically establish valid PCP claims.

Eligibility for car finance claims and PCP finance claims depends on the circumstances of the individual agreement and the FCA's scheme rules.

£9.1bn Is Not the Amount Expected to Be Paid to Motorists

The £9.1 billion figure associated with the scheme can also cause confusion.

The FCA estimates that approximately £7.5 billion could be paid to consumers if participation reaches 75% [7].

The larger £9.1 billion estimate includes the industry's costs of administering the programme as well as consumer redress.

Around 12.1 million agreements could potentially qualify.

Average car finance compensation is estimated at approximately £829 per eligible agreement, although individual payments could be higher or lower.

The figure should therefore not be interpreted as a guaranteed payment for every consumer who financed a vehicle during the scheme period.

Not All Motor Finance Lenders Are Challenging the Scheme

The three legal challenges should also not be interpreted as representing the position of the entire motor finance industry.

A number of major lenders affected by the scheme have decided not to challenge the FCA's final rules.

Lloyds Banking Group, for example, has made substantial financial provisions for motor finance compensation but has chosen to participate in the scheme rather than bring its own legal challenge [8].

Other lenders have similarly made provisions while preparing to implement the FCA's framework.

The Upper Tribunal proceedings therefore concern objections brought by Mercedes-Benz Financial Services, Volkswagen Financial Services and CA Auto Finance rather than a collective legal challenge from every lender potentially affected by the car finance scandal.

Consumer Voice Is Challenging the Scheme for Different Reasons

A fourth challenge has been brought by Consumer Voice.

However, its position is materially different from those of the three lenders.

Consumer Voice argues that aspects of the compensation methodology do not provide sufficient redress to motorists and has raised questions about how the scheme was developed [9].

The lender challenges broadly question whether the FCA has gone too far.

This means the regulator is effectively defending the scheme against legal arguments coming from different directions.

The Upper Tribunal will need to consider each challenge on its own grounds.

What Do the Challenges Mean for Car Finance Claims?

The legal proceedings do not mean that the compensation scheme has been cancelled.

Parts of the programme were temporarily suspended in July while the challenges proceed [10]

Under that partial suspension, lenders are not currently required to complete certain activities, including calculating and paying compensation under the affected provisions.

Other requirements remain in force.

Firms must continue preparing for the scheme and progressing work that is not covered by the suspension.

Consumers can also continue making complaints if they believe they may have experienced car finance mis-selling.

Someone who has already submitted a complaint generally does not need to submit the same complaint again simply because the legal challenge is continuing.

Could the Scheme Change?

Potentially.

The purpose of the legal challenges is to test whether parts of the FCA's framework are lawful.

If one or more challengers succeed, changes could potentially be required before the scheme proceeds.

If the FCA successfully defends the challenges, the existing framework could move forward once the relevant suspension is lifted, subject to any further legal proceedings.

The fact that lenders have raised objections therefore does not itself establish that the scheme will be overturned.

Equally, consumers should not assume the final rules are completely settled until the legal process has concluded.

When Will the Legal Challenges Be Heard?

The Upper Tribunal has identified two possible hearing periods.

Proceedings could take place from 14 to 18 December 2026, or from 16 to 26 February 2027 if additional expert evidence or disclosure is required.

The hearing will consider the challenges brought by the three lenders and Consumer Voice.

A decision will follow, although further appeals could affect the eventual timetable.

This means widespread compensation payments under the suspended parts of the scheme are unlikely to begin until the legal uncertainty has been resolved.

What Happens Next?

For Mercedes-Benz Financial Services, Volkswagen Financial Services and CA Auto Finance, the next stage is to make their legal arguments before the Tribunal.

The FCA will defend its interpretation of the law, its regulatory assessment of historic motor finance practices and the methodology used to construct the compensation framework.

For motorists, the dispute does not change the basic distinction between having an historic finance agreement and having an eligible car finance claim or car finance refund.

Not every agreement involved mis-sold car finance, and not every PCP claim will qualify for compensation.

The Upper Tribunal proceedings will instead determine whether the FCA's industry-wide approach can continue in its existing form.

Until then, the lenders' criticisms and the FCA's responses remain competing legal positions rather than findings about whether the regulator's approach was right or wrong.

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References:

1. Mercedes-Benz Financial Services, Volkswagen Financial Services and CA Auto Finance UK are challenging the scheme before the Upper Tribunal - https://consumervoice.uk/cars/fca-car-finance-compensation-challenge/
2. around £7.5 billion could ultimately be returned to consumers - https://www.fca.org.uk/publication/policy/ps26-3.pdf
3. Mercedes-Benz Financial Services has criticised what it describes as a "one-size-fits-all" approach to different parts of the motor finance market - https://fstech.co.uk/fst/Lenders_Accuse_FCA_Of_Working_Backwards_On_9_1bn_Redress_Scheme.php
4. Volkswagen argues that because borrowers did not themselves directly pay the commission received by dealers or brokers, the commission should not simply be treated as money that can be "repaid" to the borrower - https://morningwire.eu/fca-worked-backwards-to-justify-motor-finance-redress-say-lenders/
5. CA Auto Finance UK, part of Crédit Agricole, is also challenging the regulator's approach - https://www.fca.org.uk/firms/information-firms-motor-finance-complaints/legal-challenge-documents
6. the Supreme Court's landmark motor finance judgment from August 2025 - https://supremecourt.uk/cases/press-summary/uksc-2024-0158
7. The FCA estimates that approximately £7.5 billion could be paid to consumers if participation reaches 75% - https://www.fca.org.uk/publications/policy-statements/ps26-3-motor-finance-consumer-redress-scheme
8. Lloyds Banking Group, for example, has made substantial financial provisions for motor finance compensation but has chosen to participate in the scheme rather than bring its own legal challenge - https://www.aol.co.uk/articles/lloyds-pay-829-compensation-customers-065900000.html
9. Consumer Voice argues that aspects of the compensation methodology do not provide sufficient redress to motorists and has raised questions about how the scheme was developed - https://pressreleasehub.pa.media/article/consumer-voice-challenges-fca-car-finance-redress-mechanism-to-seek-billions-more-for-motorists-72123.html
10. Parts of the programme were temporarily suspended in July while the challenges proceed - https://www.fca.org.uk/news/statements/motor-finance-scheme-partially-suspended