The City watchdog has warned that a wave of legal challenges to the compensation scheme for victims of the motor finance scandal could leave drivers waiting three more years for payouts, while piling £6bn of extra costs on to lenders.
Bosses at the Financial Conduct Authority (FCA), who have consistently hit out at lenders and a consumer claims group for challenging its scheme, told MPs the scandal could affect lenders for years, and have “consequences” by stretching its resources.
The FCA is facing legal challenges from four parties over its compensation scheme: lenders Volkswagen Financial Services, Mercedes-Benz Financial Services and Crédit Agricole Auto Finance, as well as the campaign group Consumer Voice, which has teamed with the claims legal firm Courmacs Legal to assert that the drivers are being short-changed.
The challenges dashed the regulator’s hopes of drawing a line under the scandal, in which drivers were overcharged for loans as a result of commission payments between lenders and car dealers between 2007 and 2024.
The FCA is instead being hauled to the upper tribunal, where a judge would be asked to review the merits of the long-awaited £9.1bn compensation programme. That could end up delaying payouts to drivers, which were widely expected to begin as early as this summer.
Even if the judge backs the FCA scheme, that would delay payouts into 2027, the watchdog’s deputy chief executive, Sarah Pritchard, told MPs on the Treasury committee on Tuesday. If it is shot down, “then we will need to consider what the options may be,” she added.
That would include launching a consultations on a newly crafted compensation scheme, or abandoning it entirely and letting complaints be sorted out through the Financial Ombudsman Service (FOS), Pritchard said.
“We estimate it would cost lenders over £6bn more and take three years to resolve claims through a complaints-led approach,” the FCA chief executive, Nikhil Rathi, said in a letter released before the committee hearing. That would affect not only the lenders challenging the scheme, but the wider group of banks implicated in the scandal, including Lloyds Banking Group, Santander UK and Barclays.
Labour MP John Grady questioned the FCA’s estimates, noting that the process could last even longer than its forecast. “The timetable you’ve set out, I suspect, doesn’t take into account the fact that the judicial review could then go to the court of appeal if it’s a point of law, and then the supreme court,” he said.
The FCA said it would also take near-£3m hit from being dragged through the courts. That could result in financial “trade-offs”, with the FCA – which is funded by the companies it supervises – having to “pivot resources” internally, Pritchard said.
The regulator was already steeling for a rise in costs, Pritchard said. “Of course this has consequences,” she added. “So we have had to pivot resources to deal with the immediate legal challenge, and the immediate legal challenge, we think, will cost us around about £2.7m extra in our costs.
“And of course, if this goes on longer, we will need to consider how we move our resources internally. It will come at some cost. There’s a trade off that we will need to make, but it’s important … consumers have been waiting a very long time to be compensated. And one way or another, they need to be compensated.”
