Writes through with details and context

LONDON, May 8 (Reuters) - Britain's financial watchdog said on Friday a tribunal hearing on legal challenges to its compensation scheme for mis-sold car loans was unlikely before October, and told lenders to prepare for a possibility that the scheme could be scrapped entirely.

Mercedes-Benz > and Volkswagen <VOWG.DE > are among four groups including a consumer group to have challenged a 9.1 billion pound ($12.3 billion) scheme imposed by the Financial Conduct Authority on the UK motor finance industry for the mis-selling.

The move was a blow for the regulator, which unveiled its final compensation scheme earlier this year in an attempt to draw a line under a 17-year scandal.

Other lenders, including big lenders Lloyds Banking Group LLOY.L, Barclays BARC.L and Santander's SAN.MC UK arm, accepted the FCA's revised scheme, after collectively setting aside billions of pounds to pay affected consumers.

"We are engaging with the Tribunal and those who have challenged the scheme on the possibility of suspending some elements of it while retaining those relating to preparatory work," the FCA said in Friday's statement, adding it would provide another update soon.

Companies should prepare "on a precautionary basis" for a tribunal decision in mid-November, the FCA noted.

"We recognise the operational strain and uncertainty firms face. We also acknowledge the frustration of consumers, many of whom have waited over 2 years for an answer," the regulator said.

Firms should continue to prepare for the scheme while also undertaking contingency planning including for the possibility of there being no scheme, it added, noting that if the scheme or parts of it were quashed the regulator would consider all options.

"Lenders need, therefore, to be operationally and financially ready for a complaint-led and supervisory approach to resolve historic liabilities," it said.

"We recognise the impact this would have on consumers who may not always complain. This would also impose significant extra costs on lenders..."

The FCA had hoped the first payments to consumers, estimated at 830 pounds per vehicle loan agreement, would start this year.

($1 = 0.7341 pounds)