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The government sought to cap payouts in the motor finance scandal at a level lenders could absorb and the City regulator acted “unlawfully” in failing to protect consumers, new court filings seen by City AM allege.
Both the Treasury and Financial Conduct Authority (FCA) are facing fresh scrutiny over the motor finance redress scheme as the car mis-selling scandal heads back to the courts.
Advocacy group Consumer Voice has enlisted claims-focused law firm Courmacs Legal to launch a bid to overhaul the £9.1bn compensation scheme, which they claim has “lost sight” of its purpose, according to court filings.
In its reply to the Financial Conduct Authority’s legal defence, Consumer Voice said internal documents revealed the regulator had “engaged continuously” with the FCA in constructing the scheme, so much so that the watchdog would not publish its consultation paper “without HMT steer”.
The filings point to former Chancellor Rachel Reeves’ attempt to intervene in the Supreme Court case due to the “perceived negative economic consequences”. The Court rejected the intervention in February 2025, months before the hearing began.
Consumer Voice said Reeves’ challenge “gives rise to a reasonable inference that HMT ‘steer’ received by the FCA in the context of the [consumer redress scheme] was to ensure redress payments would be at a level that could readily be absorbed by lenders”.
The FCA has previously slammed both Consumer Voice and Courmacs Legal for failing to give a “full and frank explanation” of their commercial activities and incentives in pushing for changes. Both would be set to benefit financially by handling cases for consumers outside of the official redress scheme, according to the FCA.
Watchdog faces challenge from consumers and industry
“By prioritising the interests of lenders over consumers, the FCA lost sight of the entire purpose of exercising its statutory power and acted unlawfully,” Consumer Voice said.
The Supreme Court partially overturned a landmark ruling on car finance deals, rejecting claims that hidden commissions were automatically unlawful. But it found one customer’s undisclosed commission created an “unfair relationship”, leaving the door open for an industry-wide redress scheme.
Four challenges to the FCA’s redress scheme, which includes that from Consumer Voice, are slated to be heard by the Upper Tribunal by as late as February 2027.
On the industry side, Volkswagen Financial Services, Mercedes Benz Financial Services, and Crédit Agricole Auto Finance have brought forward a case, arguing that the scheme forced an unlawful blanket assumption that most customers suffered a financial loss if their commissions were not clearly disclosed.
A number of the City’s top banks are on the hook for billions in payouts. Lloyds Banking Group has set aside £2bn in provisions while Santander raised its provisions to £640m earlier this year. Both banks said they were disappointed with the scheme but would not be challenging it.
The FCA has suspended parts of the programme, which anticipates an average payout of £830 for motorists, as it hopes to fend off the challenges.
A spokesperson for the Financial Conduct Authority said: “We consulted openly and extensively, and it was entirely appropriate that we’d discuss motor finance with the Treasury. But it had no role in designing a compensation scheme that aims to put £7.5bn back in people’s pockets. We’ve taken all decisions on motor finance independently.”
A spokesperson for the Treasury said: “It is vital that consumers have access to motor finance to enable them to spread the cost of a vehicle in a way that is manageable and affordable.
“We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms.”