Investec sets aside £30m for FCA motor finance review

London-listed South African banking group Investec has set aside £30m to cover potential costs from a City regulator probe into unfair car loans that could leave the motor finance industry on the hook for billions in compensation fees.

The firm, which employs around 1,600 bankers in London, said on Thursday that it had receieved a “small number of complaints” related to now-banned discretionary commission arrangements (DCAs) and was actively engaging with the Financial Ombudsman Service (FOS).

Investec has said that it believes its use of DCAs was compliant with the law and regulations in place at the time.

“Nevertheless, the group recognises that costs and awards could arise in the event that the FCA concludes there has been industry wide misconduct and customer loss that requires remediation,” it added. “Those costs and awards could arise as the result of a redress scheme, or from adverse FOS/litigation decisions.”

The FCA first announced its review in January, later confirming that it would look into deals made between April 2007 – when the Financial Ombudsman Service (FOS) first started overseeing DCAs – and January 2021 – when the practice was banned.

Investec, which entered the UK motor finance market in June 2015, said its £30m provision reflected estimates for operational and legal costs, as well as potential compensation awards, based on a range of scenarios.

Analysts have estimated that the fallout from the FCA’s review could cost banks around £16bn in compensation fees.

Lloyds, which owns the country’s biggest auto lender Black Horse, made a £450m provision in February, while in March Close Brothers, considered the most exposed bank in relative terms, outlined plans to bolster its finances by £400m in response to the probe.

The news came alongside Investec’s annual results, which saw operating income at the bank rise by five per cent in the year to £2.1bn, up from £2.0bn last year.

The revenue boost came as interest income rose 5.6 per cent in the year, thanks to “higher global interest rates”. Non-interest income also increased, with net fee and commission income rising by nearly five per cent.

This helped adjusted operating profit rose eight per cent year on year to £884.5m, up from £818.7m last year.

Investec reported that lending increased by 1.7 per cent in the period, with higher corporate lending in both the UK and South Africa. Private client lending in South Africa also grew.

Expected credit loss impairment charges decreased by 2.1 per cent thanks to recoveries from “previously written off exposures in South Africa”.

“Asset quality remains within group appetite limits, with exposures to a carefully defined target market well covered by collateral,” the firm said.

The bank plans to award a record total dividend for the year of 34.5p per share, up from 31p last year and translating into a payout ratio of 44.2 per cent.

Looking ahead, Investec said: “Revenue momentum is expected to continue, underpinned by book growth, stronger client activity levels and success in our client acquisition strategies; partly offset by expected cuts in interest rates”.

It said it expected to make a return on equity of between 13-17 per cent in the medium term. In the UK, this will be driven by the “increasing scale and relevance of our unique corporate mid-market position“.

“This performance demonstrates the continued success in our client acquisition strategies which underpinned the increased client activity and loan book growth, supported by the tailwind from the high interest rate environment,” chief executive Fani Titi said.