Motor finance: Going concern when the redress bill is unknown

Following legal challenges by three motor finance firms (Volkswagen Financial Services, Mercedes-Benz Financial Services and Crédit Agricole Auto Finance) and the consumer group Consumer Voice, the FCA’s redress scheme has been partially suspended since 2 July 2026. Until the legal process concludes, firms do not need to calculate or pay redress, but must keep preparing for the scheme and progress complaints as far as possible. The Upper Tribunal will hear the challenges between 16 February and 3 March 2027, with judgment and any appeals to follow. We do not expect clarity until mid-2027 at the earliest. In the meantime, the FCA expects motor finance firms to plan for a scenario with no scheme, make the necessary financial provisions and engage with their auditors.

On 3 November, the FCA set out its expectations for motor finance firms who wish to make settlement offers while the legal challenges continue. Barclays has already announced plans to make such offers. The FCA supports firms making settlement offers, provided customers receive no less than they would under the proposed scheme. Motor finance firms must make clear that accepting means customers keep what they are paid even if the legal challenges would have given them less, but cannot claim more if they would have given them more.

The suspension pauses payments, not costs

Motor finance firms must continue to comply with all rules that have not been suspended. These include identifying relevant complaints and agreements, and gathering commission and disclosure data back to April 2007. This work, and its cost, continues. Running a redress programme carries a large, fixed cost that does not scale with book size, so mid-market firms are hit hardest.

The suspension defers redress payments but does not remove the obligation to make a provision for the expected cost associated with redress. Under the final rules, interest at the annual average Bank of England base rate plus 1% runs from the date of overpayment, or the date the commission was paid, until compensation is paid. Therefore, every month of delay adds to the eventual bill.

Each potential outcome changes the size or timing of the liability

There are three possible outcomes to the litigation, each of which could change the amount or timing of the provisions motor finance firms hold.

The scheme is upheld substantially as drafted: The liability crystallises broadly as currently modelled, but at a later date, and potentially with more accrued interest than motor finance firms have provided for.

The scheme is amended: If the rules are partly quashed and remade, the cost of redress could fall. However, it could equally rise, as Consumer Voice has challenged the FCA’s redress calculation methodology. The reworking of scheme processes and systems would also carry its own cost.

The scheme is substantially quashed: Importantly, the underlying claims would not disappear. Motor finance firms would need to deal with them individually, using the Supreme Court's judgment in Johnson v FirstRand on unfair relationships as the reference point. Claims assessed one by one against that standard will be materially harder to model and forecast than a single industry formula.

In each outcome, a liability that could be forecast against known rules and a known timetable becomes less predictable. If the scheme is quashed, lenders lose both.

Settlement offers may give some motor finance firms earlier certainty on redress, provided they follow the FCA’s expectations and offer customers no less than the proposed scheme would have done.

What does this mean for going concern assessments and access to funding?

Motor finance firms with a 31 December 2026 year end will typically sign their accounts in Spring 2027. Their going concern assessment must then look at least 12 months ahead, to Spring 2028. The Tribunal’s judgment, and possibly any appeal, is likely to land within that period, but neither will be known when the accounts are signed. Directors must therefore assess whether the motor finance firm can continue as a going concern without knowing the outcome of the Tribunal, and auditors must evaluate the reasonableness of that assessment.

For most motor finance firms, the likely result will be enhanced disclosure of the estimation uncertainty in the provision. Where the range of outcomes is large relative to a firm’s capital or liquidity, a material uncertainty related to going concern becomes a real possibility. Either way, disclosure should cover the litigation timetable and the range of possible outcomes. Boilerplate wording that does not quantify the exposure, or acknowledge that costs could rise as well as fall, is unlikely to be adequate.

This uncertainty is also likely to affect the cost and availability of funding. For thinly capitalised firms, the withdrawal of a funding line would cause financial stress far more quickly than the cost of redress itself.

Testing the support behind the assessment

Group versus entity: Going concern is assessed on an entity-by-entity basis. A UK regulated entity can face a material uncertainty, even where its wider group is well capitalised, unless group support is committed and enforceable.

Shareholder and sponsor support: Private equity-backed motor finance firms should confirm whether:

• support is documented rather than only verbal
• an equity cure right exists and, if so, whether it has already been drawn
• shareholder loans are subordinated and, if so, on what terms
• the fund has enough uncommitted capital, and enough remaining fund life, to provide further support.

Captive lenders: Motor finance firms that finance sales of their parent’s vehicles should check whether the parent’s letter of support:

• is legally binding or only a letter of comfort
• caps support at a level that would cover a realistic redress bill
• excludes regulatory redress or conduct liabilities
• runs long enough to cover the litigation timetable.

Duration is easily overlooked. Support letters often cover only the 12-month going concern period, so a letter signed in 2026 could expire before the Tribunal gives judgment, leaving the firm without support when it may be needed most.

Directors’ duties while the outcome is unknown

Three of the statutory duties directors owe to the company are particularly relevant now:

Promoting the success of the company: Directors must act in good faith in the way most likely to promote the company’s success for the benefit of its members, having regard to the long-term consequences of decisions and the interests of customers, employees and suppliers.

Exercising independent judgment: Directors must form their own view rather than rubber-stamping the wishes of others.

Exercising reasonable care, skill and diligence: Directors must stay informed, including on regulatory developments, data requirements and whether the business has the senior skills to see the process through.

If a firm’s financial position deteriorates significantly, directors must also take account of creditors’ interests.

Until the outcome is known, boards should document key decisions, including the reasoning, the options considered and the advice received.

What motor finance firms should do now

Firms should treat the pause as a planning window, not a reprieve, so that their redress plan, business plan and wind-down plan tell a consistent story and hold up under each possible outcome.

Engage early with auditors: Revisit the basis of the provision and the going concern assessment well ahead of year end, and agree with auditors the scenarios to be modelled, evidence to be provided and disclosures needed in the financial statements.

Engage with funders: Review facility terms and maturity dates, including any renewals due in 2028, which auditors will also ask about. Speak to funders before year end and, where a material uncertainty could trigger a default, discuss waivers or amendments early.

Forecast and stress test liquidity: Run forecasts against each possible outcome, track covenant headroom under each, and reverse stress test to identify the level and timing of redress that would exhaust headroom.

Prepare for a no-scheme outcome: If the scheme is quashed, there may be no pause on complaint handling. Firms should be ready to handle complaints within the usual statutory timescales.

Update wind-down planning: Existing plans may already be out of date. Update them for the range of outcomes, including a solvent run-off of the book, so that any market exit is orderly.

Our Financial Services Restructuring team works with motor finance firms and their funders on contingency planning, funding and restructuring options, including sell-side processes. We also support firms in their engagement with the FCA.

For more information, contact Jarred Erceg or Amanda Smith.