Treasury’s role in motor finance redress scheme under court scrutiny

The government’s attempt to limit payouts in the motor‑finance mis‑selling scandal has been called unlawful in fresh court filings, which accuse HM Treasury of pressuring the regulator to set a cap that lenders could comfortably absorb. Consumer advocacy group Consumer Voice, working with claims‑specialist Courmacs Legal, has lodged a challenge to the £9.1bn redress scheme, arguing it has drifted from its original purpose.

Legal challenge intensifies

The filings reveal that former chancellor Rachel Reeves tried to intervene in a Supreme Court case, citing possible negative economic effects. The court rejected the intervention in February 2025, months before the hearing began. Consumer Voice interprets the move as evidence that Treasury guidance to the Financial Conduct Authority was intended to keep compensation at a level lenders could easily manage.

The FCA has defended its independence, stating it consulted widely and that Treasury had no hand in designing the scheme, which aims to return roughly £7.5bn to affected motorists.

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.

Implications for lenders and borrowers

Major banks are already on the hook for large provisions, Lloyds Banking Group set aside £2bn and Santander increased its reserve by £640m earlier this year. Both firms said they were disappointed with the scheme but would not contest it.

Automotive finance arms including Volkswagen Financial Services, Mercedes Benz Financial Services and Crédit Agricole Auto Finance have launched a separate case, arguing the scheme wrongly assumes most customers suffered a loss simply because commissions were not disclosed.

The Upper Tribunal is scheduled to hear four challenges to the redress plan, including Consumer Voice’s, with hearings potentially running until February 2027. A ruling could either reaffirm the current payout framework or force a redesign that may increase compensation levels, reshaping the balance between consumer protection and lender liability.

As the legal battle unfolds, the outcome will determine whether the motor‑finance redress scheme delivers on its promise to compensate millions of borrowers or whether the financial industry will see a rollback of the compensation caps it helped shape.