Motor finance lenders have accused the Financial Conduct Authority (FCA) of “working backwards” to justify its £9.1 billion redress scheme, as legal challenges to the compensation programme continue ahead of hearings later this year.

Mercedes-Benz Financial Services, Volkswagen Financial Services and Crédit Agricole Auto Finance are challenging the scheme at the Upper Tribunal, arguing that the regulator has misinterpreted the Supreme Court judgment that opened the way for industry-wide compensation.

Mercedes-Benz Financial Services, which has set aside up to £400 million for potential payouts, said the FCA’s “one-size-fits-all approach” across the motor finance market “risks sowing the seeds of failure for the scheme as a whole”. It accused the regulator of reaching an initial conclusion that commission arrangements were harmful before developing its approach to support that position.

The legal challenge follows a Supreme Court ruling last year which rejected the argument that undisclosed commissions were automatically unlawful, while finding that one borrower’s undisclosed commission had created an “unfair relationship”. The judgment allowed the FCA to develop a broader redress scheme covering motor finance agreements issued between 2007 and 2024.

The FCA has defended its approach, with chief executive Nikhil Rathi saying in March: “It’s time for lenders to put right the fact they broke the law.” The regulator has said it will defend the scheme robustly, while parts of the programme were suspended in July pending the legal challenges.

The suspension means lenders do not currently have to calculate or pay compensation, or contact eligible consumers about redress, according to the FCA. If the scheme survives the legal process, payments could begin in 2027, while a revised scheme could push compensation into 2028 or later.

Consumer Voice, which is separately challenging the scheme on behalf of consumers, has argued that the proposed average payout of £830 per affected loan is insufficient. The group’s co-founder Alex Neill said: “We remain resolute and confident in our challenge on behalf of millions of consumers who are being short-changed by the redress scheme.”

The FCA has disputed Consumer Voice’s position and is seeking to challenge the group’s application, citing concerns about its funding and commercial relationships. The regulator has said it continued engaging with the organisation after an April meeting that Consumer Voice alleges involved warnings about the consequences of pursuing legal action.

Hearings in the wider legal challenge are expected in December or February 2027, with the outcome determining whether the FCA’s proposed £9.1bn framework survives or is replaced.

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