Britain’s financial regulator is facing a legal challenge over its £9.1 billion motor finance compensation scheme, after a consumer rights group accused the watchdog of prioritising the cost to lenders over the protection of millions of drivers.
Consumer Voice, represented by Courmacs Legal, is challenging the Financial Conduct Authority’s plan to compensate motorists who were mis-sold car finance between 2007 and 2024.
The group argues that consumers risk being “short-changed” by the scheme’s methodology.
An estimated 12.1 million car finance agreements are eligible for redress, with an average payout of about £829.
The FCA’s scheme is designed to return £7.5 billion to consumers, with the remainder of the £9.1 billion package covering firms’ administrative costs.
At the centre of Consumer Voice’s challenge is the interest rate used to calculate compensation. Court filings accuse the FCA of selecting a rate that “knowingly set the floor below the actual borrowing costs of most consumers”.
The watchdog has set the minimum compensatory interest rate at 3 per cent, based on the annual average Bank of England base rate plus one percentage point.
The legal filing argues that the FCA considered adding 8 percentage points to the Bank’s base rate but rejected the higher figure because it would have increased the cost to lenders and created greater market and legal risks.
It said the FCA “made firm impact and operational simplicity the dominant consideration in its decision-making”.
“Whilst the FCA recognised that an 8% rate would directly address consumer concerns, it rejected this on the basis that it “would significantly increase total redress costs for firms”, the risk of challenge by lenders and market impacts,” the document read.
“The FCA’s own data showed that unsecured personal loan rates exceeded 3% for almost the entire scheme period, and that many consumers – particularly those with weaker credit profiles – would have borrowed at materially higher rates.”
The filings also claim that concerns were raised by a former FCA chief economist who had sat on the regulator’s cost-benefit analysis panel shortly before the final scheme was published.
Peter Andrews, who served as the FCA’s chief economist between 2013 and 2017, said: “The fact that one scheme may be cheaper than another does not seem to be an adequate basis for a decision to favour the cheaper scheme when the main objective of the scheme must be consumer protection,” the document claims.
The dispute highlights the difficult balance facing the FCA as it attempts to draw a line under a scandal that has left lenders facing billions of pounds in potential compensation while millions of consumers await redress.
The FCA has said it will defend the scheme as the best means of resolving the long-running dispute and has described it as “fair to consumers and proportionate for firms”.
It has also warned that the legal challenges have created further uncertainty for consumers and the motor finance industry, delaying payouts that had been expected to begin this year. The Upper Tribunal is due to hear the challenges in December or February next year, with judgments expected in the following months.
The regulator has separately sought to have Consumer Voice’s challenge dismissed, questioning how the organisation’s legal action is funded, its relationship with its solicitors and potential conflicts of interest.
Consumer Voice has rejected those concerns, saying it has “no commercial interest in the outcome of this challenge” and that it considers the action to be “in the interests of consumers who stand to lose billions in redress under the scheme as it presently stands”.
The FCA is also facing separate legal challenges from the financial services arms of Volkswagen and Mercedes-Benz, as well as Credit Agricole’s car finance business. Those challenges are based on different grounds from Consumer Voice’s attempt to secure larger payouts.
The controversy stems from motor finance agreements issued between 2007 and 2024, when commission arrangements between lenders and car dealers resulted in consumers being charged more for loans. The FCA’s industry-wide scheme was introduced in March after years of regulatory and legal scrutiny.
A spokeswoman for the FCA said: “Our scheme is the quickest, fairest and most efficient way to put £7.5 billion back in consumers’ pockets and we are defending it robustly.
“It is unfortunate the challenges have delayed payouts for consumers that were due to begin this year, especially as household bills come under greater pressure.
“We will respond fully to these challenges in court.”
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