The government sought to cap payouts in the motor finance scandal at a level lenders could absorb, while the City regulator acted “unlawfully” by failing to protect consumers, according to new court filings seen by City AM.

The Treasury and the Financial Conduct Authority (FCA) are facing renewed scrutiny over the motor finance redress scheme as the car mis-selling scandal returns to the courts, with the outcome likely to shape how quickly consumers are compensated and how much pressure falls on lenders already making provisions.

Advocacy group Consumer Voice has enlisted claims-focused law firm Courmacs Legal to seek an overhaul of the £9.1bn compensation scheme, which it says has “lost sight” of its purpose, according to the filings.

In its reply to the FCA’s legal defence, Consumer Voice said internal documents showed the regulator had “engaged continuously” with the FCA in building the scheme, to the extent that the watchdog would not publish its consultation paper “without HMT steer”.

The filings refer to former Chancellor Rachel Reeves’ attempt to intervene in the Supreme Court case because of 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 criticised both Consumer Voice and Courmacs Legal for failing to give a “full and frank explanation” of their commercial activities and incentives in pressing for changes. The regulator said both would stand to benefit financially by handling cases for consumers outside the official redress scheme.

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 agreements, rejecting claims that hidden commissions were automatically unlawful. However, it found that one customer’s undisclosed commission created an “unfair relationship”, leaving the door open for an industry-wide redress scheme.

That legal backdrop matters because the FCA’s proposed programme is intended to resolve a broad set of claims without sending each case through the courts individually, but it is now being tested on both procedure and scope.

Four challenges to the FCA’s redress scheme, including the one brought by Consumer Voice, are due 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 a case arguing that the scheme imposed an unlawful blanket assumption that most customers suffered a financial loss if their commissions were not clearly disclosed.

A number of major City banks are exposed to billions of pounds in payouts. Lloyds Banking Group has set aside £2bn in provisions, while Santander increased its provisions to £640m earlier this year. Both banks said they were disappointed with the scheme but would not challenge it.

The FCA has suspended parts of the programme, which anticipates an average payout of £830 for motorists, as it attempts to fend off the legal 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.”