What next for the FCA‘s Motor Finance Compensation Scheme?

On 7 July 2026, the FCA published certain key documents in relation to the legal challenge to its Motor Finance Consumer Redress Scheme (the Scheme) pursuant to ss.404 and 404A of the Financial Services and Markets Act 2000 (FSMA). The Upper Tribunal (Tax and Chancery Chamber) will hear the case, with the hearing currently being likely to be listed to commence on 14 December 2026 or 16 February 2027.

In a letter dated 8 June 2026, Nikhil Rathi, the FCA’s Chief Executive, wrote to the Treasury Select Committee (the TSC) to answer its questions in relation to the Scheme, including how its timetable for compensating consumers will be affected by the legal challenges made in relation to the Scheme. Mr. Rathi said that if the Scheme is upheld, we can expect payments to begin in 2027. A member of the TSC at its hearing on 8 June 2026 raised the prospect of further delays if the matter was appealed to the Court of Appeal on a point of law and potentially further appealed to the Supreme Court.
 

So what could happen going forward?

The Upper Tribunal

Having waited for the Supreme Court to give its judgment in August 2025, the FCA published the Scheme in final form in March 2026.

Three lenders and a consumer group have since exercised their rights to challenge the terms the Scheme before the Upper Tribunal.

The FCA has previously summarised the aspects of the Scheme that have been challenged. Those grounds included:-

• The FCA’s power to make the Rules, and its approach to identifying consumers’ losses in deciding that it has that power.

• The application of the Rules to agreements entered into before 1 April 2014.

• The FCA’s application of the law relating to limitation periods, which affects whether consumers have suffered loss or damage for which compensation is payable.

• Rules for determining whether lenders are liable and whether consumers suffered loss or damage, including rules requiring lenders to presume that:

  - there was an 'unfair relationship' (within the meaning of s 140A of the Consumer Credit Act 1974 (“CCA”) between lender and consumer wherever a relevant arrangement was not adequately disclosed; and

  - wherever there was an unfair relationship between lender and consumer, it caused the consumer to suffer loss or damage.

• The Rules governing the calculation of redress.

The premise of a number of these grounds of challenge to the Scheme rules appears to be that they do not reflect a legal right to compensation that could be established by a borrower, which is a prerequisite of a Consumer Redress Scheme under S. 404 of the FSMA.
 

Outcomes in the Upper Tribunal?

It is not possible to predict the outcome of the challenge to the Scheme, but there are a range of possibilities which might include:-

1. Scheme 1 covering agreements entered into before 1 April 2014 and Scheme 2 covering agreements entered on or after that date are both upheld as drawn by the FCA;

2. Scheme 1 is not upheld, thus excluding agreements entered into before 1 April 2014, but Scheme 2, covering agreements entered on or after that date, is upheld as drawn by the FCA;

3. Schemes 1 and 2 are substantially upheld but with relatively straightforward modifications necessary;

4. Scheme 1 is not upheld but Scheme 2 is upheld but with similar modifications necessary;

5. Schemes 1 and 2 are required to be heavily modified. This might bring into question the overall viability of the Scheme as a whole.

Whether any of these scenarios are subject to appeal in a matter of mere speculation but if appealed, that could obviously impact timing.

The Upper Tribunal has the power to quash those rules which it determines are non-compliant, but it cannot unilaterally revise the terms of the Scheme. It is not clear whether the FCA would simply be able to revise any rules found to be invalid, or whether it would have to re-consult on amended rules. I would suggest it may be the latter, which could involve a further, lengthy process.

In parallel, the Court of Appeal have allowed mis-sold car finance cases to be grouped together as one collective action. The Court of Appeal upheld (judgment here) the High Court’s decision that thousands of claims made under s.140B(1)(a) of the CCA can be conveniently dealt with under eight omnibus claim forms against eight motor finance companies alleging that they failed to make sufficient disclosure of their commission arrangements with dealers.

The Court of Appeal’s decision was procedural rather than concerning liability, remitting the matter to the County Court for further directions. The timing of any substantive hearing in those proceedings in once again uncertain. In giving judgment, Lord Justice Coulson added “.. I am acutely aware that the claims in this appeal are, in some respects, the tip of an iceberg and that the court service, and Birmingham County Court in particular, are currently inundated with single claim forms with thousands of claimants. I do not underestimate the huge increase in workload that such multi-claimant claims engender”.
 

Conclusion

The FCA have recommended that claimants should use the Scheme where eligible, but they will face the potentially significant delays described above. Litigants in civil proceedings may also face delays in achieving an outcome. I should also spare a thought for the lenders who will presumably now face material uncertainties as to their potential liability to make redress and as to its timing, whether under the Scheme or in legal proceedings. Any provisioning decisions will be all the more difficult in these circumstances.

I have one further observation. Having awaited the outcome of the Supreme Court’s decision, it seems that it may have been possible for the FCA to more closely align a consumer redress scheme to the Supreme Court’s decision (an “Initial Scheme”). As well as introducing such a presumably less controversial Initial Scheme, it could at the same time have chosen to separately consult on a second, wider scheme (a “Second Scheme”) containing the elements which are now in contention.

By choosing this form of bifurcation, I would speculate that it would be more likely in those circumstances that the Initial Scheme could proceed to early distribution and be less likely to be challenged. Those who are now challenging the FCA’s current Scheme would be able to have their “day in court” if they remained concerned about the fairness of that Second Scheme.

This might have meant those clear-cut cases for compensation in line with the Supreme Court’s decision could be met without delay.