The motor redress scheme announced by the FCA on 30 March 2026 raises an interesting question about the extent of the FCA’s powers. Can the FCA require redress to be paid for conduct which, at the time, it did not regulate?
What is the motor redress scheme?
In its consultation paper of 7 October 2025 (CP 25/27), the FCA proposed exercising its powers under section 404 of the Financial Services and Markets Act 2000 (“FSMA”) to create a scheme which requires lenders to provide redress to a large class of consumers who borrowed to purchase cars and other motor vehicles. The proposed scheme covered motor finance agreements taken out between 6 April 2007 and 1 November 2024.
Many respondents to the consultation pointed out that the FCA only became responsible for regulating consumer credit on 1 April 2014. They questioned whether the FCA has power to impose a scheme in respect of agreements entered into before that date.
The FCA’s response has been to split its original scheme in two. Scheme 1 will cover motor finance agreements taken out before 1 April 2014, while Scheme 2 covers agreements taken out thereafter. The FCA’s hope is that a challenge to its power in respect of the earlier period would not affect Scheme 2, and that redress under that scheme can proceed while any challenge to Scheme 1 is resolved.
Has the FCA conceded anything?
The FCA’s Policy Statement 26/3 (PS 26/3) setting out the redress schemes expressly recognises that a scheme covering both periods “could face an elevated risk of legal challenge”. This is an unusual move: public authorities do not generally announce to the world that there are questions as to whether they have power to do what they are doing. Some might call this a concession. But it is unlikely to be one that makes any real difference.
A redress scheme can be challenged by application to the Upper Tribunal under section 404D of the Financial Services and Markets Act 2000 (“FSMA”). Judicial review principles apply and an application can only be made with the Tribunal’s permission.
The FCA would now find it hard to oppose permission on the basis that there is no realistic argument that its powers do not extend to pre-April 2014 agreements. PS 26/3 comes very close to conceding that point. But, in reality, the Tribunal was always likely to accept that it is at least arguable that the FCA lacks power to impose redress in respect of pre-April 2014 agreements. So the “concession” is realistic and is unlikely to affect whether permission will be given.
If a challenge is made and permission is granted, the FCA’s acknowledgement that one ground of challenge is arguable is unlikely to make any difference to the outcome.
So the FCA has not really given up anything in pure litigation terms. And it is unlikely that the FCA’s acknowledgement of the risk of challenge will cause anyone to begin review proceedings who would not have done so anyway.
What would be the ground for challenging Scheme 1?
To understand the potential for challenge it is necessary to understand how the FCA’s power to require redress arises and the basis on which it is requiring redress to be given.
The background is, of course, the Supreme Court’s decision in Hopcraft v Close Brothers [2025] UKSC 33. The Supreme Court upheld a claim relief under section 140A of the Consumer Credit Act 1974 (“CCA”). That allows the court to grant relief if the relationship arising out of a consumer credit agreement is unfair to the debtor. The non-statutory claims, based on the idea that loan brokers owed a fiduciary duty, or some lesser disinterested duty, to borrowers were rejected.
The rationale for the motor finance redress schemes is that many consumers would be entitled to bring claims under CCA section 140A. The schemes are intended to provide a simple means by which they can make a recovery. Section 140A of the CCA came into force on 6 April 2007, which is why that is the start date of Scheme 1.
The potential attack on Scheme 1 referred to in PS 26/3 appears to be this:
- One of the pre-conditions to the exercise of power under FSMA section 404(1)(b) is that the FCA considers that consumers have suffered (or may suffer) loss or damage.
- Therefore, if the person who suffered the relevant loss or damage was not a consumer, section 404 is not engaged.
- So far as relevant, section 404E of FSMA defines “consumer” as a person who has used services “provided by authorised persons in carrying on regulated activities”. A “regulated activity” is an activity specified in the Regulated Activities Order (SI 2001/544, the “RAO”): FSMA section 22.
- Entering into a regulated credit agreement is now specified in article 60B of the RAO, but the FCA has only had the function of regulating consumer credit since 1 April 2014, when the Office of Fair Trading was abolished and its relevant functions transferred to the FCA.
- So, the argument goes, a borrower who entered into a credit agreement before 1 April 2014 was not using services provided by a person carrying on a regulated activity, and the borrower was therefore not a consumer for the purposes of section 404 of FSMA.
It may be added that there is a second, related, argument, which is not directly referred to in PS 26/3. FSMA section 404 only applies where the FCA considers that that there may have been a failure “by relevant firms” to comply with requirements applicable to them. Relevant firms are, for these purposes, persons authorised under FSMA. But, before April 2014, a consumer lender would not be licensed under the CCA, not authorised under FSMA.
Has the FCA explained its power to impose Scheme 1?
In explaining why it is splitting the redress scheme, the FCA says, in essence, that it considers that:
- Widespread or regular failures caused consumers loss or damage between 6 April 2007 and 1 November 2024.
- Firms’ liability for those failures arise under law which applied throughout the entire period.
- If the FCA did not intervene, “a prolonged period of complaints and litigation would create sustained uncertainty for consumers as well as firms and their investors, and could hinder the sector’s ability to move forward, with potential implications for wider market confidence and growth.”
This explanation does not directly address whether the FCA has power to impose a redress scheme in respect of agreements which were not within its regulatory perimeter when entered into.
It may be that the FCA has decided that it is better to keep its powder dry for the moment, and respond to a challenge if and when it comes.
How might the FCA respond to an application to review Scheme 1?
The FCA can point out that section 404(1)(a) applies in respect of “any activity” by relevant firms, not just the activity in respect of which they are authorised.
Furthermore, the reference in PS 26/3 to law which applied throughout the period suggests that the FCA will point to two relevant OFT guidance documents which the Supreme Court noted were, “so far as relevant, not materially different in their substance from the [current] rules and guidance of the FCA” (para [251]). The FCA will likely argue that the effect of FSMA section 404F(4) is that redress schemes can be imposed whether or not the requirements firms failed to comply with arise under FSMA, any other statute, “a rule of law or otherwise”. The FCA may argue that the OFT’s guidance documents contain “requirements” arising “otherwise” and that Scheme 1 is in respect of a failure to comply with those requirements.
There are few clues, however, as to how the FCA intends to respond to the argument that a person who took out a credit agreement before April 2014 is not “consumer” as defined in FSMA section 404E. The FCA may say that consumer credit lending is now a regulated activity and that is sufficient because the rationale for section 404 redress schemes is to enable redress to be provided efficiently and cheaply to persons who have suffered loss from breaches of regulations and other requirements for which authorised persons are responsible.
Additionally, the FCA may rely on its general rule making powers under FSMA section 137A. That provides that the FCA can make such rules applying to authorised persons “as appear to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives”. Of particular relevance is the consumer protection objective (FSMA section 1C). The FCA may argue that it considers enabling consumers to obtain redress in respect of rights under CCA section 140A in an efficient and cheap way is necessary or expedient to secure an appropriate degree of protection for consumers.
If the FCA relies on its general rule making power, the question will arise whether it can use section 137A powers in respect of a matter specifically covered by section 404. In other words, can the FCA use section 137A to justify a redress scheme which it does not have power to impose under section 404? The answer to that question, and the other issues raised, must await an application to the Upper Tribunal.