Car finance payouts hang in the balance ahead of legal battle

Millions of car finance payouts hang in the balance as the UK watchdog signalled that its compensation scheme faces further delays, changes or potential collapse ahead of legal battles.

The Financial Conduct Authority (FCA) told motor finance firms to prepare for the possible scenario that its redress scheme will not go ahead at all.

The regulatory body is facing four separate legal challenges from parties who are not happy with its plans for redress, which would result in an estimated average of £829 per payout.

The FCA said it is not clear when the case will be heard but that is unlikely to be before October.

In the meantime, it is in discussions about the “possibility of suspending some elements” of its compensation scheme, while still urging lenders to prepare for payouts.

But the regulator said it was also considering its options should parts of the scheme be quashed by the courts, including proceeding with a revised version or asking lenders to plan for a scenario where “there would be no scheme”.

This could mean lenders need to be ready to respond to complaints from car finance customers individually, rather than under the rules of an industry-wide programme set by the FCA.

“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 FCA set out the final details of its compensation scheme in March, which it estimated could cost the industry about £9.1 billion in total.

It had been expecting millions of claims to be paid out this year and the vast majority settled by the end of 2027.

The financial services arms of carmakers Volkswagen and Mercedes-Benz and the car finance arm of French bank Credit Agricole, as well as Consumer Voice, a group representing consumers, are asking the courts to quash the scheme, arguing the rules are unlawful.

“Between the four separate legal challenges, it is claimed in effect that the FCA’s approach to establishing the schemes has been both unduly favourable to consumers and unduly favourable to lenders,” the watchdog said.

At least one claim alleges that the FCA has breached the rights of lenders under the 1998 Human Rights Act, according to the watchdog.

Despite the uncertainty of the legal cases, the watchdog is still advising consumers to complain directly to their lender if they think they might be owed compensation, which they can do for free using a template letter on its website.