Whenever something bad happens — and FirstRand’s R17.7bn provision for the UK vehicle commission scandal is pretty bad — the natural question is this: who is to blame?
As it happens, there is quite a lot of blame to go around, and not all of it rests with the banks.
To understand why, start with the bare facts. The UK Financial Conduct Authority’s (FCA’s) final redress scheme, announced last month, covers motor finance customers treated unfairly between 2007 and 2024 by a slew of banks, of which FirstRand was just one. This redress will cost the industry £9.1bn.
So were the banks at fault?
Oddly, that is the least controversial part. The old UK motor finance model allowed dealers to receive commissions from lenders, and through notorious discretionary commission arrangements, the dealer actually had the scope to hike customers’ interest rates and earn more for doing so.
The FCA banned those arrangements from 2021, as they created an incentive to sell more expensive credit. The practice has long been banned in Australia, and FNB’s South African business in WesBank prevents dealers from hiking interest rates, partly because of what happened in the UK.
Where the banks are facing questions from investors is that many had not set aside large enough provisions to cater for the fine. FirstRand, like many banks, was caught napping too.
Yet, there is justification for this “underprovision” — not least because of what analysts have described as the FCA’s “overreach” in the eventual settlement.
The larger-than-expected fines happened because, rather than confining itself to loans before the 2021 change, the FCA expanded its scope to include fixed commissions on vehicle loans after that date.
The FCA justifies this by arguing that even after discretionary commissions were banned in 2021, car dealers still received fixed-rate commissions that were so high that the customers should have been told about them. It said there was a correlation between higher broker commissions (of more than 39%) and a higher cost of credit for the customer.
But the regulator goes far further than the UK courts. While the Supreme Court, which ruled on this last August, endorsed a nuanced, case-by-case test of unfairness, the FCA built a blunt formula that presumes unfairness across the board.
FirstRand CEO Mary Vilakazi tells the FM that this is too harsh. She says that if “the commission you pay to the dealer” now has to be paid again to the customer, that is “way beyond what can be deemed to be fair or compensating customers for harm”.
She does, however, concede that there can “never be a dispute” that commissions should always be disclosed. And on this score, the banks certainly were found wanting.
So, who is ultimately to blame for what happened?
Well, first, the banks profited from a sales structure that created obvious conflicts and disclosed too little. Second, dealers sat in the middle of that structure and monetised the ambiguity. And third, the regulator let the model become entrenched, then came back years later with the zeal of the converted.
The writer has shares in FirstRand Group.
