The Financial Conduct Authority (FCA) has been directed by the Upper Tribunal to partially suspend its compensation scheme for car finance mis-selling, a move that could affect thousands of consumers awaiting redress. The ruling, delivered on July 2, 2026, represents a significant setback for the regulator's efforts to expedite payments to those affected by the mis-selling of discretionary commission arrangements (DCAs) in car loans.
Background of the Compensation Scheme
The FCA launched the compensation scheme in 2024 after it was found that many car finance lenders had failed to disclose commissions paid to brokers, leading to higher costs for borrowers. The scheme was designed to provide a streamlined process for consumers to claim compensation without having to go through the Financial Ombudsman Service or the courts. However, the scheme faced criticism from some lenders and consumer groups, who argued that it was too broad and could lead to excessive payouts.
The Upper Tribunal's Decision
The Upper Tribunal's order requires the FCA to suspend processing claims that involve loans where the commission was disclosed but not fully explained. This partial suspension is expected to affect an estimated 15,000 claims currently in the pipeline, according to sources close to the case. The tribunal ruled that the FCA had overstepped its authority by including such cases in the compensation scheme without proper legal basis.
In a statement, the FCA said: "While we are disappointed with the decision, we will comply with the tribunal's order and are reviewing its implications. Our priority remains ensuring that consumers who have suffered harm receive fair compensation, and we will work to address the tribunal's concerns."
Impact on Consumers and Lenders
The partial suspension has created uncertainty for both consumers and lenders. Consumer advocacy groups have expressed concern that the delay could leave many borrowers without redress for months or even years. "This is a devastating blow for thousands of people who were expecting compensation for being overcharged on their car loans," said Sarah Johnson, a spokesperson for Consumer Rights UK. "The FCA must act swiftly to resolve the legal issues and get the scheme back on track."
On the other hand, lenders have welcomed the decision, arguing that the compensation scheme was too generous and could have cost the industry billions of pounds. The finance industry has long maintained that the FCA's approach failed to distinguish between cases where consumers were genuinely misled and those where they were simply unaware of the commission structure.
Next Steps
The FCA has been given 28 days to appeal the tribunal's decision or to propose amendments to the compensation scheme that would address the legal concerns. In the meantime, the regulator will continue to process claims that fall outside the scope of the suspension, including those where no commission was disclosed at all. The total number of claims affected by the suspension represents approximately 10% of all claims lodged under the scheme, according to data from the FCA.
Legal experts suggest that the ruling could have broader implications for the FCA's ability to design compensation schemes in the future. "This decision reinforces the principle that regulators must operate within the bounds of the law, even when pursuing consumer protection objectives," said Mark Thompson, a partner at a leading London law firm.
