FCA confirms it will defend compensation scheme against legal challenge

The Financial Conduct Authority said on 1 May 2026 that its motor finance compensation scheme has been legally challenged, and that it will defend the scheme as lawful. The regulator said it had published a separate statement setting out its expectations following the challenge¹. Hampshire Trust Bank, in guidance to its own customers, records that the FCA announced the challenge on 1 May 2026 and that the scheme was partially suspended on 2 July 2026 following legal challenges being considered by the Upper Tribunal².

The FCA states that the Upper Tribunal has suspended parts of the scheme. Until the legal process concludes, lenders do not need to calculate or pay compensation to people owed money under the scheme, but must comply with all rules that are not suspended¹. Hampshire Trust Bank tells customers that as a result there may be a delay in determining whether compensation is payable and, where applicable, in making any compensation payments, and that customers who have already complained do not need to take any action².

The scheme covers motor finance loans taken out between 6 April 2007 and 1 November 2024¹. The FCA says 12.1 million agreements made between 2007 and 2024 are now eligible, fewer than under its original proposals, and that the average payout has increased to around £830 per agreement. It estimates 75% of eligible consumers will claim, which would mean total redress paid of £7.5bn¹.

The FCA says eligibility criteria have been tightened, average compensation increased for older agreements and a minimum 3% compensatory interest rate per annum added. Payouts will be capped in around 1 in 3 cases¹. People are compensated only if they were not told clearly about certain arrangements, including that their dealer or broker set the interest rate to earn more commission, or that commission was high, defined as at least 39% of the total cost of credit and 10% of the loan¹. There are exceptions, including where commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date¹. Claims for high value loans, meaning amounts higher than 99.5% of other loans that year, are not covered; those consumers can still complain to firms and the Financial Ombudsman Service¹.

Why it matters for households

The suspension means people owed money under the scheme may wait longer to find out whether they are due compensation and to receive it. The FCA says lenders do not need to calculate or pay compensation while parts of the scheme are suspended¹. Hampshire Trust Bank states there may be a delay in determining whether compensation is payable and in making payments².

The FCA's published timetable, before the suspension, set implementation periods ending 30 June 2026 for loans taken out from 1 April 2014 and 31 August 2026 for those agreed earlier. Lenders would have 3 months from the end of the implementation period to tell complainants whether they are owed compensation and how much, and 6 months to contact people who had not complained but were likely to be owed money. Anyone not contacted would have until 31 August 2027 to claim¹. The FCA also says people who complain before the relevant implementation period ends will be compensated sooner, and that there is no need to use a claims management company or law firm, as doing so could mean losing over 30% of any money received¹.

What happens next

The FCA says it will defend the scheme as lawful, and that the Upper Tribunal has suspended parts of the scheme until the legal process concludes¹. Hampshire Trust Bank states the challenges are currently being considered by the Upper Tribunal². The FCA has not reported a date for the tribunal's decision.