Payouts Halted Amid Legal Challenges
The UK's financial watchdog has been forced to pause payouts on its £9.1 billion car finance redress scheme, meaning millions of motorists face further delays to compensation. The Financial Conduct Authority (FCA) is facing legal challenges from four companies unhappy with its plans to compensate people mis-sold a car loan.
Payouts were meant to start this year but are now facing significant delays. The UK's Upper Tribunal has agreed to hear the legal challenges in December or February next year, with a judgment expected in the following months.
Companies Challenge Scheme's Legality
The financial services arms of carmakers Volkswagen and Mercedes-Benz, the car finance arm of French bank Credit Agricole, and Consumer Voice – a group representing consumers – are asking the courts to quash the scheme, arguing the rules are unlawful. The FCA said the tribunal had ordered that parts of its motor finance scheme were suspended on terms agreed with the four parties involved.
The pause means that lenders will no longer need to calculate or pay compensation to people owed money, nor tell customers about compensation they are owed, until the legal process concludes. This puts the brakes on the process of paying out an estimated 12.1 million car finance agreements eligible for redress, at an average of £829 per payout, under the FCA's plans.
Firms Must Continue Preparations
Lenders will, however, have to keep preparing for the scheme and progressing customer complaints as far as possible – including telling people if they are not owed any compensation. Firms are also expected to contact customers who have complained to explain the legal challenges and why they are causing delays.
If judges decide to uphold its scheme, and the judgment is not appealed, then the FCA expects payments to begin in 2027. The FCA said it will need to decide what to do next if the courts decide to overturn the programme and there can be no industry-wide compensation scheme. This could involve switching to a complaints-led approach to resolving individual claims.
Without a scheme in place, the FCA has estimated that up to 19 million complaints would need to be handled individually, taking three years and costing lenders £6 billion more.
