The Financial Conduct Authority (FCA) has faced significant legal scrutiny over its recently finalised motor finance redress scheme, which is projected to cost the industry £9.1 billion, with an estimated £7.5 billion earmarked for consumer payouts. A prominent regulatory expert has warned that key aspects of the compensation plan may be unlawful, raising questions about the regulator's authority.

The scheme aims to address a widespread scandal where car lenders paid undisclosed commissions to dealers for arranging vehicle finance, leading to consumers potentially overpaying. The FCA announced its final rules for redress, separating the process into two periods: April 2007 to March 2014, and April 2014 to November 2024. This split is tied to the FCA taking over responsibility for regulating the consumer credit market in April 2014 from the Office of Fair Trading.

John Swift KC, a barrister and former rail regulator who also previously reviewed an FCA redress scheme, has labelled the initiative as "very poor" regulatory policy and practice. He argues that "serious fault lines" exist, particularly questioning the FCA's legal powers to implement a scheme extending back to before April 2014. Swift contends that the regulator is effectively attempting to retrospectively apply its rules to a period when it did not possess statutory authority over consumer credit activities. He highlights that Section 404E of the Financial Services and Markets Act 2000 (FSMA) limits redress schemes to activities regulated by the FCA at the time.

While acknowledging the contentious nature of extending its powers, FCA Chief Executive Nikhil Rathi has maintained that the regulator possesses the necessary authority to implement the scheme. An FCA spokeswoman further stated that roughly four million agreements prior to April 2014 require compensation because firms breached the Consumer Credit Act, which was in force throughout. The regulator also cited a published legal opinion concluding that the failures addressed in the scheme would be found by a court or tribunal to constitute a failure to comply with a requirement.

The FCA explained that dividing the redress process into two schemes is a pragmatic approach designed to prevent delays in compensation for consumers with agreements post-April 2014, should the earlier period face a legal challenge. However, critics like Swift remain unconvinced, suggesting the FCA has not adequately rebutted arguments based on the ordinary language of the statute regarding its legal "vires" or powers. Concerns have also been raised about the scheme's alleged departures from Supreme Court rulings on car finance, the determination that over 40% of agreements were unlawful despite previous oversight, and the use of novel economic analyses for payouts.

Consumers, who were previously advised by the FCA to await the scheme's details rather than pursue costly legal avenues, now face further uncertainty regarding the full legality and implementation of the compensation plan.