The Financial Conduct Authority (FCA) has issued further guidance for firms and consumers on its proposed motor finance redress scheme, following a series of legal challenges that are likely to delay implementation.

While the FCA’s objective to deliver fair compensation to affected consumers as quickly as possible remains unchanged, however, the scheme’s future timetable and structure are now subject to uncertainty.

This update provides important direction for lenders, intermediaries and advisers, as well as practical guidance for consumers.

A scheme under challenge

The FCA has consistently maintained that an industry-wide redress scheme is the quickest, fairest and most cost-effective route to compensate consumers affected by historic motor finance commission arrangements.

However, the scheme is now facing legal challenge in the Upper Tribunal, with those challenging the scheme arguing that the underlying rules are unlawful, either in whole or in part, and should therefore be quashed. Interestingly, the scheme is being challenged for being both unduly favourable to consumers and unduly favourable to lenders.

At present, it is unclear when the Tribunal will hear the case, although this is unlikely to be before October 2026. In the meantime, the FCA is engaging with both parties to consider whether elements of the scheme can be paused, while allowing preparatory work to continue.

The FCA have said that lenders should prepare on a precautionary basis for a decision in mid-November 2026. Accordingly, if the scheme quashed, lenders should be ready from then to deal with complaints within the usual statutory timeframes.

This uncertainty has created significant operational challenges for firms, alongside frustration for consumers, many of whom have already waited over two years for resolution.

FCA approach: continue preparing, but with flexibility

Despite the legal challenge, the FCA is clear that firms should continue to prepare for the scheme until told otherwise.

In particular, firms are encouraged to progress work that will be required regardless of the final outcome, including:

  • identifying relevant complaints and agreements;
  • gathering data on commission arrangements and disclosure practices, including from brokers;
  • resolving duplicate representation issues involving claims management companies (CMCs) or law firms;
  • continuing to cooperate fully with the Financial Ombudsman Service (FOS) in respect of referred complaints.

Firms are still expected to submit implementation plans by 12 May 2026, although the FCA has confirmed it will take a pragmatic approach. Formal attestations will not be required at this stage, and firms may qualify their submissions where appropriate.

Importantly, the FCA has also indicated that it will not require firms to meet the scheme’s original timetable for customer communications, recognising the uncertain legal position.

Complaint handling: what should firms do now?

The FCA has restated that Complaints that fall entirely outside the scheme should continue to be handled in the usual way. The FCA also explained that where a complaint contains both scheme-related and unrelated issues, the FCA is considering whether firms should consider progressing the unrelated aspects now.

Contingency planning: a “no scheme” scenario

In a significant development, the FCA has emphasised the need for firms to prepare for the possibility that the scheme, or elements of it, could be quashed.

In that scenario, the FCA has indicated that it would supervise firms on the basis that no industry-wide redress scheme exists, with outcomes instead driven by individual complaints and supervisory intervention.

While no final decisions have been made, the FCA has set out a number of indicative assumptions to guide contingency planning:

  • Consumers will be encouraged to complain directly to lenders (rather than using CMCs or law firms).
  • Firms should be operationally ready to process complaints by mid-November 2026 within normal statutory deadlines.
  • The current pause on complaints will not be extended indefinitely.
  • In the absence of immediate FCA rules on redress methodology, firms will need to rely on relevant court judgments and Tribunal reasoning.
  • The FCA will work closely with the FOS to support consistency and manage volumes of complaints.

The FCA has also signalled that it may consider using supervisory or enforcement powers to require firms to proactively identify and contact affected customers, even where those customers have not complained.

This “no scheme” scenario is expected to be more resource-intensive and costly for firms, reinforcing the FCA’s view that an industry-wide scheme remains the preferred outcome.

Implications for lenders and advisers

The FCA’s latest guidance highlights dual-track preparation: firms must continue to progress scheme implementation, while simultaneously planning for a complaint-led alternative.

Key practical implications include:

  • ensuring robust data collection and governance around historic commission arrangements;
  • reviewing complaint handling capacity and resourcing;
  • engaging early with auditors on provisioning assumptions;
  • strengthening oversight of third parties, including brokers and CMCs;
  • maintaining close engagement with regulators and the FOS.

Firms should also be mindful of regulatory expectations regarding the conduct of CMCs and law firms. The FCA has encouraged firms to report concerns about poor conduct, which may be addressed through its joint regulatory taskforce.

Guidance for consumers

The FCA has reiterated that consumers who are concerned about their motor finance arrangements should complain directly to their lender.

This process is free, and avoids fees charged by CMCs or law firms, which can exceed 30% of compensation. Consumers are also warned against signing agreements with multiple representatives, which could result in duplicate fees.

Where consumers are dissatisfied with the conduct of a CMC or law firm, complaints may be escalated to the relevant ombudsman – either the Financial Ombudsman Service (for FCA-regulated firms) or the Legal Ombudsman (for solicitors).

Looking ahead

The legal challenge introduces a period of prolonged uncertainty for the motor finance sector. However, the FCA’s message is clear: firms should continue preparing for the scheme, while ensuring they are ready for a complaint-driven alternative.

Further updates are expected as the Tribunal timetable becomes clearer. In the meantime, firms and advisers should take a proactive and flexible approach, balancing regulatory expectations with contingency planning to manage potentially significant volumes of claims.

How we can help

The evolving motor finance redress landscape presents complex legal, regulatory and operational challenges. Our team combines deep regulatory expertise with first-hand insight into developments across the sector to support clients at every stage.

We can assist with:

  • Scheme readiness and implementation – advising on FCA expectations, reviewing implementation plans, and supporting firms in identifying and analysing relevant agreements, commission structures and disclosure practices.
  • Contingency planning – helping firms prepare for a “no scheme” scenario, including complaint-handling frameworks, resourcing strategies and interaction with the Financial Ombudsman Service.
  • Litigation and dispute risk – advising on potential exposure arising from historic commission arrangements, including claims risks in the courts and before the FOS.
  • Regulatory engagement – supporting dialogue with the FCA and other regulators, including responses to information requests, supervisory engagement and managing investigations.
  • Third-party risks – advising on relationships with brokers, claims management companies and legal representatives, including managing conduct concerns and customer outcomes.
We are closely monitoring developments, get in touch with Guy Stevenson or a member of the team to discuss the implications for your business.