Car finance compensation update: FCA redress scheme for mis-selling delayed after legal challenge

Millions of drivers hoping for car finance compensation payouts this year are likely to have to wait longer after a legal challenge has forced the Financial Conduct Authority (FCA) to pause key parts of its proposed redress scheme.

The regulator has confirmed that the Upper Tribunal will hear challenges to its motor finance compensation scheme in either December 2026 or February 2027, with a ruling expected months later.

As a result, lenders do not currently have to calculate or pay compensation under the scheme while the legal process continues.

Here's what the latest delay means for anyone who has already complained about car finance mis-selling and those thinking of making a claim.

What is the motor finance compensation scheme?

The FCA planned to introduce a redress scheme for customers who may have lost out because of unfair commission arrangements in motor finance agreements.

The proposals focus on three types of potentially unfair arrangements:

• Discretionary commission arrangements

• High commission arrangements

• Certain tied finance arrangements

The regulator previously described a compensation scheme as the quickest and most efficient way to compensate affected consumers.

Why has the car finance compensation scheme been delayed?

The FCA's proposed compensation scheme is facing legal challenges from several parties, including Volkswagen Financial Services, Mercedes-Benz Financial Services and Crédit Agricole Auto Finance.

The Upper Tribunal has now agreed to hear those challenges and has partially suspended the scheme while the case is ongoing.

According to the FCA, the suspension is designed to prevent firms from carrying out work that could have to be repeated if parts of the compensation scheme are overturned.

Will car finance compensation still be paid?

It is now expected payouts will take place in 2027, as long as the legal challenge is not successful.

The FCA says that while the legal challenge is ongoing, lenders do not need to calculate compensation or make payments to customers who may be owed money.

If the scheme is overturned, compensation could be delayed further while the FCA decides its next steps.

What happens if the compensation scheme is scrapped?

The FCA says it still wants consumers to receive fair compensation as quickly as possible.

If the scheme is struck down, the regulator may instead require lenders to deal with complaints through the normal complaints process.

Under standard FCA complaint rules:

• Firms typically have eight weeks to respond to complaints

• Consumers can escalate complaints to the Financial Ombudsman Service (FOS)

• The Ombudsman can independently review decisions

The regulator has warned that developing an alternative compensation scheme could trigger further legal challenges and potentially delay payments until 2028 or later.

I already complained - what happens now?

The FCA says lenders must continue reviewing complaints and tell customers if they are not entitled to compensation under the scheme, subject to limited exceptions.

If your lender decides you are not due compensation, it should write to you by the following deadlines:

• 18 November 2026 if your finance agreement started on or after 1 April 2014 and you complained by 30 June 2026

• 18 January 2027 if your agreement began before 1 April 2014 and you complain by 31 August 2026

If you complain after those dates, firms should usually respond within five months.

If you are owed compensation, it's unlikely you'll get it before 2027.