The UK’s financial watchdog has suspended parts of its under-fire £9bn motor finance redress scheme amid fierce backlash from industry and consumer groups.

In a statement on Thursday, the Financial Conduct Authority (FCA) said the suspension will require firms to continue preparations for the scheme but avoid work that “may need to be repeated” if challenges succeed.

The suspension comes after an order from the Upper Tribunal ahead of the regulator’s legal battle with Volkswagen Financial Services, Mercedes Benz Financial Services, and Crédit Agricole Auto Finance. Consumer Voice is also bringing forward a challenge represented by Courmacs Legal.

As part of the suspension, firms do not have to figure out exactly how much money a consumer is owed and do not have to pay out any compensation to those owed whilst the legal challenge is ongoing.

Lenders will also be completely exempt from following deadlines for calculating, communicating and paying out redress until the Upper Tribunal process concludes. Hearings are expect to take place as late as February 2027.

Motor finance heads back to legal arena

The return to the legal arena comes after the motor finance scandal – which relates to ‘secret’ commission deals between lenders and dealers – travelled through the Court of Appeal and the Supreme Court.

The highest court in the land ruled in the favour of lenders last August on two out of three cases brought to the Justices, but the door was opened for an industry-wide redress scheme on the grounds of ‘unfairness’ after the commission charged to one consumer was found to be outsized.

The FCA 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.

The regulator sent letters, seen by City AM, to more than 100 motor finance firms earlier this month raising concerns with how the sector planned to implement the redress program.

“We are very concerned about many firms’ operational readiness to handle complaints,” the letter said.

Challenges to the scheme have been filed on 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.

The regulator said in May 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. 

Manufacturers have led the charge for the financial services industry, with a number of the City’s banking giants with exposure choosing not to challenge the scheme.

Lloyds Banking Group – which has set aside £2bn in payouts – said whilst it was “disappointed” it would not challenge the scheme. Meanwhile, Santander raised its provisions to £640m leading to a first-quarter profit hit but the Spanish banking giant has also confirmed it will not challenge the scheme.