Banks ‘not ready’ for motor finance scheme, says City watchdog

The City watchdog has warned that motor finance lenders are “not as ready as we would expect” for the introduction of its long-awaited redress scheme.

Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), has written to the Treasury Committee following inquiries around the legal challenges to its car mis-selling scheme.

The regulator published its finalised proposals at the end of March, where lenders were put on the hook for £9.1bn, lower than previously expected, after the number of qualifying agreements was slimmed to 12.1m from 14.2m.

But over the last few months, the watchdog has received legal challenges from the financial services arms of manufacturers, including Mercedes-Benz and Volkswagen, as well as an omnibus claim from Consumer Voice.

“Unless we say otherwise, firms must keep preparing,” Rathi wrote to the chair of the Treasury Committee Dame Meg Hillier. 

“Based on our engagement with them, we are concerned that many are not as ready as we would expect.”

A number of the City’s biggest institutions have found themselves caught up in the long-running saga. Lloyds Banking Group – which owns the UK’s largest motor finance lender Lloyds – has made a £2bn provision whilst Barclays has set aside £325m.

FCA warns of ‘trade-off’ amidst legal battle

The FCA said its costs driven from the scheme up to the end of March 2026 had reached £20.5m, with the legal challenge expected to add an extra £2.7m.

“This has consequences, we have had to pivot resources to deal with the immediate legal challenge,” Sarah Pritchard, deputy chief of the FCA, told the Treasury Committee in a hearing on Tuesday.

“If this goes on longer, we will need to consider how we move our resources internally. It will come at some cost, there is a trade-off we need to make”.

Pritchard stressed the need for a “healthy motor finance market” but added the watchdog would defend its scheme “robustly”.

“Consumers have been waiting a long time and they must be compensated – one way or another”.

Compensation payouts are unlikely to be paid out before 2027, the FCA said, with the case not expected to be heard by the Tribunal before October 2026.

Watchdog fights on both fronts in motor finance row

The FCA has gone on the offensive against claims management companies (CMCs) that have encouraged consumers to pursue action outside of the scheme.

“Many [consumers] will feel stuck between lenders that broke the law and a claims industry driven by commercial interests,” Rathi said.

He added that banks will face an extra £6bn on their overall bill if the scheme is abandoned in favour of a complaints-led approach.

The saga – which has been brewing since the beginning of 2024 – relates to the use of ‘secret’ commission deals between lenders and dealers that left customers in the dark. 

It has travelled through the Court of Appeal and to the Supreme Court last year, where the Lord Justices handed lenders a lukewarm win, which kept the door open to an industry-wide redress scheme.

“The cause of this issue is lender misconduct. Firms failed to properly disclose commission arrangements, meaning consumers were not given the information they needed to make informed decisions and, in many cases, paid more than they should have,” Rathi wrote.

Last month, the regulator said challenges to its schemes have targeted the FCA’s application of the law relating to limitation periods, which affects whether consumers have suffered loss or damage for which compensation is payable.

It added that it had received a challenge by at least one of the applicants regarding the alleged unlawful interference with lenders’ property rights under the Human Rights Act 1998.

Despite a pushback from manufacturers and consumers, many of the City’s banking giants have opted not to challenge the scheme.
Lloyds said whilst it was “disappointed” it would not challenge the scheme. Meanwhile, Santander has also confirmed it will not challenge the scheme.