The City regulator has “nakedly taken the side of lenders” in its planned compensation scheme for car loan victims, a group of cross-party MPs has claimed, adding that the watchdog had been “patently influenced” by concerns over profits.

The All-Party Parliamentary Group (APPG) on Fair Banking has joined a growing chorus of critics concerned about the Financial Conduct Authority’s (FCA) proposed redress scheme, which is meant to compensate borrowers who were overcharged as a result of controversial commission arrangements between lenders and car dealers.

The APPG’s latest report has accused the regulator of buying into “doom-mongering” by lenders, who claim that a large compensation bill risked spooking investors and causing lasting damage to the UK economy.

That was at the expense of car loan victims who they said were due up to £15.6bn rather than the £8.2bn-£9.7bn currently forecast in the FCA’s scheme, which the APPG said was based on estimates produced by the regulator in 2019. It also warned that the scheme hinged on overly complex calculations that lenders could exploit, while acting as “judge and jury” on their former customer’s claims.

“Rather than siding with consumers in deciding the levels of redress the regulator appears to have nakedly taken the side of lenders, working to protect their profit margins rather than the pockets of consumers,” the report said.

“Time and again in its consultation document the FCA warns how ‘higher [redress] costs to firms could dent profit margins’ or ‘higher costs to lenders in this scenario could have knock-on impacts on lender profit margins’. These warnings all follow the same basic pattern, a warning about profits, caveated with the risk to the market of lenders withdrawing their products and hitting consumer choice.”

Banks are due to pay out £700 per claim on average under the FCA’s proposals, which the APPG says is far less than the £1,500 average payout that some could receive by taking their cases to court.

However, banks and the FCA have warned that borrowers who use claims firms to take their cases to court may end up losing up to 30% of their compensation in legal fees.

Lenders and lobby groups have for months warned that a massive bill could deter investors, force some lenders to fold, or raise borrowing costs for consumers as they try to recoup their costs.

The chancellor, Rachel Reeves, attempted to intervene in a landmark supreme court hearing in January, when she urged judges to avoid handing “windfall” compensation to borrowers.

At that point, lenders including Lloyds, Barclays, Close Brothers and the financial arms of manufacturers such as Ford were steeling themselves for a compensation bill worth up to £44bn bill. A landmark supreme court case in August brought further clarity and significantly brought down the regulator’s estimates of the potential compensation bill.

However, lenders have continued to lobby against the £11bn bill – which accounts for administrative costs. Santander UK’s chief executive, Mike Regnier, last week called for further interventions by ministers, claiming the FCA’s current proposals could end up inflicting “significant” harm to consumers, jobs and the broader economy.

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The APPG member and Labour MP Siobhain McDonagh suggested that those lobbying efforts had seeped into the FCA’s proposals. “Our core finding is that the FCA has patently been influenced by the profit margins of the lenders when deciding upon levels of redress.

“From proposing that lenders act as judge and jury on their own cases, to the extraordinarily low compensatory interest rate on offer, the scheme acts against the interests of the consumer and markedly favours sector interests,” McDonagh, who separately serves as a member of the Treasury committee, added. “Ultimately, this report comes to a clear and unambiguous conclusion – the redress scheme as proposed is not fit for purpose.”

The FCA said in a statement: “We have proposed a scheme to fairly compensate motor finance customers in a timely and efficient way.

“We recognise that there will be a wide range of views on the scheme and not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”

The Financing and Leasing Association was contacted for comment.