South African banks caught in UK’s sweeping auto finance probe

Investec has set aside funds to pay for possible compensation and other costs linked to its auto finance business in the UK as regulators continue with an industrywide probe into whether such loans were sold in a way that treated customers fairly.

The South African lender will provide an exact amount for the provision when it reports its annual results in May, Chief Executive Officer Fani Titi said on a media call on Wednesday. Still, the bank expects profits for the year ending in March to be between £866.9 million ($1.1 billion) and £909.6 million, which would be up from the £818.7 million it posted in the same period a year earlier.

“As you can see, the results are quite strong even after factoring in a provision,” Titi said. “We remain comfortable that we were compliant, but clearly there is an investigation on the go. And we have looked at the number of different scenarios of potential outcomes, and, on a prudent basis, we have made a provision.”

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Shares of Investec rose as much as 3.8% on Wednesday in London. The stock trades both in London and Johannesburg.

The UK’s probe focuses on a practice known as discretionary commission arrangements, which allowed car dealerships to earn thousands of extra pounds for themselves, and the bank, by pushing up the interest rate they offered buyers. The system, which the regulator banned in 2021, ultimately incentivised dealers to pick a higher rate for customers.

“It was a global industry practice, so it’s not something that has only been limited to the UK; many countries have come out and said they would like these practices to be tidied up,” Alan Pullinger, the outgoing CEO of FirstRand, said in an interview. “But now we are gonna go back and, and now we want to readdress from what happened 20 years ago. You haven’t seen that in other countries, but it’s unfortunately what we’ve got in the UK.”

FirstRand’s MotoNovo unit would likely face costs of £319 million tied to redress the issue, according to analysts at Anchor StockBrokers. That would represent about 13% of the company’s forecasted profits for its fiscal 2024 year, the analysts said in January.

Lloyds Banking Group Plc, the UK’s biggest provider of car finance, has set aside £450 million to pay for possible compensation and other costs linked to the car finance probe. Close Brothers Group Plc said this week that its looking to bolster its capital by as much as £400 million as it prepares for the fallout from the probe.

© 2024 Bloomberg

William Murphy

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