Regulatory Scrutiny Intensifies as Tesla Navigates FSD Challenges

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Tesla's ambitious driver-assistance system, Full Self-Driving (FSD), faces mounting pressure from U.S. regulators. This comes as the electric vehicle maker simultaneously restructures its business model for the technology and contends with declining vehicle deliveries and heightened competitive threats, casting a shadow over its core operations.

The National Highway Traffic Safety Administration (NHTSA) has granted Tesla additional time to comply with a comprehensive data request. The automaker's new deadline is February 23, 2026, extended from the original date of January 19, to supply further information regarding FSD's functionality.

This extension is tied to an ongoing probe, initiated in October 2025, examining whether the software has contributed to traffic violations. The investigation encompasses approximately 2.9 million vehicles equipped with FSD. The agency launched its review following reports of concerning vehicle behavior, which included instances of:
* Running red lights
* Traveling on the wrong side of the road
* Collisions with other vehicles resulting in injuries

Complaints filed with the NHTSA had reached 62 cases by December 2025, up from 58 reports in October.

Manual Review of Thousands of Data Points

In a letter to the regulator, Tesla justified the request for more time by citing the sheer volume of information required. The company stated that 8,313 data records still require manual review to identify incidents potentially relevant to the investigation. With a processing capacity of about 300 records per day, Tesla deemed the extra time necessary.

The company also highlighted the strain of responding to multiple NHTSA inquiries concurrently. In addition to the FSD probe, Tesla is preparing responses related to separate investigations concerning:
* Delayed accident reporting
* Issues with inoperative door handles
* FSD performance in limited visibility conditions, a case opened after a fatal crash in October 2024

Tesla argued that three substantial requests in a short period could overextend resources and compromise response quality. The company further indicated it may seek additional extensions after completing initial reviews.

Strategic Pivot to Subscription Model

This regulatory scrutiny coincides with a strategic shift in how Tesla offers FSD. On January 14, 2026, CEO Elon Musk announced the company would discontinue one-time purchases of the FSD option, moving entirely to a subscription model priced at $99 per month.

This transition firmly positions FSD as a source of recurring revenue. Rather than relying on large upfront payments, Tesla aims to build a steady income stream from the driver-assistance software—a key pillar in its argument for a software-centric business model.

Regulators, however, continue to classify FSD as a Level 2 system, meaning the driver must remain attentive and in control at all times. Tesla consistently reminds authorities and courts that users are repeatedly warned the system does not enable autonomous driving.

Core Business Faces Headwinds

The regulatory debate unfolds during a period of operational challenges for Tesla. The company reported 1.64 million vehicle deliveries for 2025, a 9% decline from the previous year. This marks the second consecutive year of falling sales.

Simultaneously, competition is intensifying. Chinese automaker BYD delivered 2.26 million vehicles in 2025, surpassing Tesla to become the world's largest producer of electric vehicles and stripping Tesla of its growth leader status.

Additional pressure may arise from a potential regulatory action in California. The state's Department of Motor Vehicles (DMV) has indicated it could impose a sales suspension of up to 30 days if allegations are confirmed that Tesla overstated FSD's capabilities in advertising. Such a measure could take effect early in 2026, sending a significant signal in Tesla's home market.

Valuation Questions Loom Ahead of Earnings

Despite the blend of regulatory pressure and delivery declines, Tesla's share price has recently shown stability. The stock closed yesterday at $438.57, maintaining a solid gain over a twelve-month horizon but remaining nearly 10% below its recent 52-week high.

A degree of Wall Street skepticism is reflected in the average analyst price target of $390, approximately 11% below the current trading level. This discrepancy fuels debate over whether Tesla's valuation—representing a market capitalization of around $1.5 trillion—remains justified amid declining vehicle sales, or if excessive hopes for autonomous driving technology are propping up the share price.

Key dates are now in focus for investors. Tesla is scheduled to release its Q4 2025 financial results on January 28, 2026. Shortly after, on February 23, the new deadline for the NHTSA response in the FSD probe arrives. This concentrates investor attention on both near-term financial performance and potential regulatory milestones for FSD.