On 30 March 2026, the FCA published the finalised rules for its redress scheme to compensate consumers for the inadequate disclosure of motor finance commission. The scheme rules came into force on 31 March 2026, although firms have until 30 June 2026 before they must start contacting affected consumers. However, ‘sufficiently interested’ parties now have three months in which they can challenge the legality of the scheme by applying for a judicial review. If a challenge is made, it will likely materially delay implementation of the scheme.
In the first of a series of bulletins on the FCA's recently published consumer redress scheme in relation to motor finance, we consider one of the grounds on which the scheme might be challenged.
One element of the FCA’s redress scheme that has attracted significant comment is the decision to bring within its scope motor finance agreements entered into as far back as 2007. This includes those predating 1 April 2014 when consumer credit first became a regulated activity under the Financial Services and Markets Act 2000 (FSMA), and when the FCA first became responsible for regulating that activity.
The FCA’s Policy Statement introducing the finalised scheme alludes to the legal argument which, if correct, means the FCA have no legal standing or entitlement (“vires”) to bring agreements pre-dating April 2014 within the scope of the first scheme.
“Statutory power (‘vires’) under section 404 FSMA
2.26 A significant number of respondents across all stakeholder groups accepted that this range captured the period during which the relevant consumer harm may have arisen. However, a significant number – particularly among firms and their trade bodies – advanced views that the FCA does not have statutory power (or ‘vires’) under section 404 FSMA to include agreements predating 1 April 2014 in the redress scheme.
2.27 These respondents emphasised that the statutory definition of ‘consumer’ in section 404E FSMA requires the use of services provided by an authorised person carrying on regulated activities. As consumer credit was not a regulated activity under FSMA before April 2014, these firms submitted that borrowers from that period fall outside the statutory scope of section 404 FSMA.”
Section 404E of FSMA does indeed include such a limitation. For the purpose of the FCA exercising its consumer redress scheme powers under Section 404 FSMA, “consumers” are defined as those:-
“(a) who have used, or may have contemplated using, any of the services within subsection (2); or
(b) who have relevant rights or interests in relation to any of the services within that subsection
(2) The services within this subsection are services provided by …… authorised persons in carrying on regulated activities;”
Accordingly, because firms offering motor finance were not, until 1 April 2014, authorised persons conducting activities regulated by the FCA, some parties are arguing that the FCA have no power to order firms to compensate consumers in relation to agreements entered into prior to that date. However, the FCA’s response is that they “remain of the view that we have the power to introduce a scheme which covers the entire period of 2007-2024.”
While the FCA refer to evidence of the widespread or regular failures that caused loss or damage to consumers across the period from 6 April 2007 to 1 November 2024 and point to their assessment that a scheme is more desirable when compared with alternative approaches, the FCA do not answer the legal argument that has been raised.
They go on to say this (our emphasis):-
“We consider that firms’ liabilities for those failures arise under the existing law for that entire period, irrespective of whether the FCA exercises its powers under section 404 FSMA to establish a scheme. The scheme provides a structured and consistent mechanism for efficiently delivering timely redress in respect of those existing obligations.”
The FCA appear to be saying that because firms may have a liability to consumers in relation to agreements pre-dating 1 April 2014 (due to the existence of an unfair relationship under section 140A of the Consumer Credit Act 1974 (CCA)), the FCA can and should exercise their statutory powers under S.404 FSMA to include such agreements within the scope of a mandatory redress scheme “irrespective of whether the FCA exercises its powers under section 404 FSMA to establish a scheme”. This is tantamount to saying the FCA are exercising their powers irrespective of whether it is in their power to do so. However, the question is not whether certain firms may have liability to consumers in relation to agreements pre-dating 1 April 2014; it is whether the FCA have jurisdiction to compel those firms to pay compensation to the relevant consumers under a s.404 redress scheme. The FCA can only exercise those powers that it has under statute to address perceived wrongdoing. The doctrine of “ultra vires” is a well-established principle of English law: public authorities cannot act beyond their powers. There is a difference between, on the one hand, identifying that another may have engaged in wrongdoing which gives rise to a legal obligation to compensate and, on the other, having the power to enforce the obligation to compensate for that wrongdoing.
The Leading Counsel’s opinion included in the FCA’s policy statement does not appear to shed any further light on this issue, limiting its conclusion to the view “that the failures which would be addressed by the Proposed Schemes are those that a court or tribunal would find to constitute a failure to comply with a requirement”. This conclusion also avoids any distinction between identifying that another may have engaged in wrongdoing, which gives rise to a legal obligation to compensate, and whether the FCA have the power to enforce the obligation to compensate for that wrongdoing.
In light of the feedback the FCA received on this point, which they concede has “particularly rais[ed] the possibility of legal challenge to the application of the scheme to pre-1 April 2014 agreements”, they are no longer pursuing a single scheme spanning the periods both before and after 1 April 2014 which could face a legal challenge that might materially delay or disrupt delivery of the scheme. Instead, the FCA have decided to adopt 2 schemes, the first covering agreements entered into from 6 April 2007 to 31 March 2014 (inclusive of both dates), and the second covering agreements entered into from 1 April 2014 to 1 November 2024 (again inclusive of both dates).
It remains to be seen whether the first scheme (for the 2007 to 2014 period) will be challenged in the Courts, and whether such a challenge succeeds. In our next bulletin, we will examine the FCA’s arguments as to why the ordinary six-year limitation period for bring claims is to be disapplied in determining whether claims are eligible under the FCA’s scheme.
