A trio of motor finance lenders have accused the City watchdog of “working backwards” to justify its redress scheme, which is expected to cost the industry billions and has become one of the most closely watched consumer compensation disputes in UK financial services.

In new documents, Mercedes-Benz’s financial services arm, which has set aside as much as £400m in payouts for the car mis-selling scandal, said the Financial Conduct Authority’s (FCA) “one-size-fits-all approach” across all segments of the market “risks sowing the seeds of failure for the scheme as a whole”.

The watchdog introduced the £9.1bn scheme after last year’s Supreme Court judgment rejected claims that hidden commissions were automatically unlawful, but found that one customer’s undisclosed commission created an “unfair relationship”. That ruling opened the door to an industry-wide redress programme, with the FCA later saying the scheme was intended to return billions to affected motorists and avoid a slower, case-by-case process.

The scheme has triggered legal challenges from three industry groups and advocacy firm Consumer Voice, which argue the regulator has misinterpreted the Supreme Court’s ruling.

“The approach taken is the result of the Authority having started from the erroneous conclusion that such arrangements were harmful and working backwards in order to justify that view,” Mercedes-Benz said in its reply to the regulator’s defence.

The firm added that “overmuch emphasis” had been placed on the regulator’s “expertise as the sector regulator, implicitly suggesting that substantive errors of law can and should be disregarded if there are policy reasons to do so”.

An FCA spokesperson said: “Our scheme is the quickest, fairest and most efficient way to put £7.5bn back in consumers’ pockets and we are defending it robustly. It is unfortunate the challenges have delayed payouts for consumers that were due to begin this year, especially as household bills come under greater pressure.

“We will respond fully to these challenges in court.”

FCA says lenders should put right what they did wrong

The FCA said it plans to defend the scheme “robustly”, with hearings scheduled as late as February 2027 in the Upper Tribunal.

When the programme was announced in March, FCA chief executive Nikhil Rathi said: “It’s time for lenders to put right the fact they broke the law.”

The watchdog suspended parts of the programme in July. The scheme anticipates an average payout of £830 for motorists and was paused as the FCA sought to fend off the legal challenges. That delay matters for consumers because the timetable for compensation now depends on the outcome of the tribunal process, while firms continue to weigh the legal and financial implications of the redress regime.

Volkswagen Financial Services, which is fighting alongside Mercedes-Benz to overturn the scheme, said: “The FCA’s approach… is based mostly on the repeated invocation of the mantra of ‘regulatory judgement’ as some kind of impregnable shield against the applications.”

It argued that because borrowers under motor finance agreements do not themselves pay commission, there was no commission to be “repaid” to the borrower.

The FCA described the lenders’ interpretation of the redress as “absurd” and said they wanted to “let the foxes guard the hen house”.

Credit Agricole, the third lender seeking to overturn the scheme, said the “idiom is both misplaced and, worse, indicates and fundamental misunderstanding by the FCA of the nature of its power”.

In separate filings by Consumer Voice, the Treasury was accused of seeking to cap payouts for consumers at a level lenders could absorb. The FCA rejected that claim and said all decisions were taken independently.