South Africa’s most valuable bank in serious trouble

FirstRand may need to raise a further provision to protect itself against potential losses that may result from its UK motor finance dispute.

The financial services giant said parts of the redress scheme that have been proposed to settle this dispute are disproportionate and unreasonable.

It also warned that the redress scheme could harm the UK economy, potentially resulting in a contraction in the supply of credit to consumers.

FirstRand’s UK headache arose from a controversy surrounding transparency concerns in how dealers earn commissions from lenders. 

In October 2024, the UK Court of Appeal ruled that FirstRand and other lenders had unlawfully arranged motor finance deals without adequately disclosing the commissions paid to car dealers. These lenders were also accused of not obtaining fully informed consent from customers.

FirstRand appealed this ruling to the UK Supreme Court, arguing that motor dealers should not owe fiduciary duties to consumers and that its past practices were compliant with then-existing laws.

This appeal was partially successful, with the Supreme Court overturning key parts of the Court of Appeal’s ruling.

However, it upheld one “unfair relationship” ruling, finding that a lender had acted unfairly because of the high, undisclosed commission paid to the broker and the failure to disclose a contractual tie.

In response to this, the UK’s financial regulator, the Financial Conduct Authority (FCA), released a statement proposing a redress scheme for commission practices in the UK motor finance industry.

The regulator said there is now sufficient legal clarity to proceed with a compensation scheme, which would launch later in 2026.

This scheme would cover regulated motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker.

The FCA estimated that 14.2 million agreements – 44% of all agreements made since 2007 – will be considered unfair because they involve inadequate disclosure of one or more of the following:

• A discretionary commission arrangement
• High commission, where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan
• Contractual ties that gave a lender exclusivity or a right of first refusal

The regulator added that around 85% of eligible consumers would take part in the scheme, which would mean estimated redress of £8.2 billion (about R168.2 billion), including interest.

Proportionate and reasonable

At the time this redress scheme was proposed, FirstRand told shareholders that it would need more time to review the statement fully.

On Thursday, 6 November, the company said it is still working towards a detailed assessment of the scheme’s potential impact.

However, it said the scheme has moved materially beyond the group’s expectations of what can be considered proportionate or reasonable.

“The group is not aligned on or in agreement with many of the proposed outcomes put forward by the consultative paper,” it said.

“FirstRand is also concerned that the impact of the scheme would be negative for the broader UK economy, given the high likelihood of a contraction in the supply of credit to consumers.”

In addition, the banking group warned shareholders that it may be required to raise a further provision in its current financial year.

FirstRand has already almost doubled provisions to R6.26 billion to cover the potential compensation and other costs linked to this case.

The company explained that a further provision may be required due to –

• The increased likelihood of a higher number of pre-2021 motor finance agreements falling within the scope of the scheme
• The FCA’s proposed methodology for the calculation of redress, which is, in the group’s view, not aligned to actual potential customer loss, if any

However, the group noted that it only intends to make an adjustment to its provision if required and based on the final redress scheme.

This is because the consultation process is still ongoing, and the eventual financial impact remains unknown, meaning it could differ from the amount currently provided.

“The group continues to engage with the FCA and will consider all options and reserve all legal rights should the final scheme represent an unfair and or disproportionate outcome for lenders,” FirstRand said.