Investec Plc has allocated £30 million for potential compensation and other costs related to the UK’s Financial Conduct Authority (FCA) investigation into its auto lending business, Bloomberg reported on 23 May.
The provision, linked to the FCA’s review of historical motor finance commission arrangements and sales, increased the South African lender’s overall costs for the fiscal year ending in March.
The FCA has been scrutinising discretionary commission arrangements (DCA), a practice that allowed car dealerships to earn extra by raising interest rates for buyers. This system, banned in 2021, incentivised dealers to select higher rates, benefiting both themselves and the banks. Investec, which entered the UK motor finance market in 2015, had a £555 million book of business by 2021, equating to about 1% market share.
“We feel that it is prudent to take a provision,” said Ruth Leas, head of Investec’s main banking subsidiary. “We acknowledge significant uncertainty around this estimation and will need to wait for the FCA’s review outcome later this year.”
Investec is not alone in this situation. FirstRand Ltd., South Africa’s largest bank by market value, is expected to incur £319 million in costs related to its MotoNovo unit. Lloyds Banking Group Plc, the UK’s largest car finance provider, has set aside £450 million for potential compensation. Close Brothers Group Plc anticipates around £10 million in costs related to these historical commission arrangements.
The FCA recently warned motor finance firms to prepare for additional costs stemming from its review, highlighting the need for firms to maintain adequate financial resources. Despite these provisions, Investec’s earnings surged due to high interest rates boosting net interest income. The bank declared a record dividend of 19 pence per share, totalling 34.5 pence per share for the year.
Investec has been streamlining its business, including spinning off its asset management holdings into Ninety One Ltd. and merging its UK wealth unit with Rathbones Group. The bank announced new medium-term targets, aiming to boost return on equity to 17% and increase its dividend payout policy to 50% of adjusted earnings per share, up from 35% previously.
Frequently Asked Questions
- What is the provision made by Investec related to the FCA investigation?
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Conclusion
Investec and other financial institutions are bracing for potential costs related to the FCA’s investigation into historical commission arrangements in the auto lending sector. Despite the uncertainties, Investec remains optimistic about its future prospects and has set ambitious targets for its business growth.
