FirstRand believes it has strong legal arguments to challenge a ruling made by the UK Court of Appeals in October 2024 relating to the vehicle finance commission saga in the country.
In October last year, the UK Court of Appeal ruled against FirstRand and in favour of claimants Messrs Wrench and Johnson, who had contested an earlier judgment that deemed FirstRand’s commission arrangements unfair. This ruling has significant implications for the motor finance industry, particularly concerning the disclosure of commissions to customers.
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The lender will argue its case from 1 to 3 April in the UK Supreme Court, having received permission to appeal the judgment related to the Wrench, Johnson and Hopcraft appeals.
The October judgment in the Wrench vs FirstRand and Johnson vs FirstRand matters relates to motor finance agreements that form part of the MotoNovo Finance book that resides in the London branch.
(MotoNovo was acquired by FirstRand in 2006. In March 2018, it was integrated with Aldermore Bank following FirstRand’s acquisition of Aldermore.)
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The UK’s Financial Conduct Authority (FCA) is currently probing commission arrangements and sales by lenders in the UK motor finance industry, spanning the period from April 2007 to January 2021.
The investigation has led the motor finance industry in the UK to raise provisions in the event that it would need to pay compensation to claimants in relation to discretionary commission arrangements.
Read: FirstRand profit slows amid R3.3bn provision for UK auto-loan unit
Immediate appeal
FirstRand CEO Mary Vilakazi notes that the industry was “taken aback” by the adverse ruling in October. “We want to do the right thing by customers, but it needs to be sensible.”
She spoke to Moneyweb on Thursday afternoon after presenting the lender’s interim results for the six months ended 31 December earlier on the day.
In the notes to its financial statements for the period under review, FirstRand states that it has a contingent liability following the October judgment.
However, the judgment goes beyond the scope of the original commission review by the FCA for which FirstRand raised a £127.4 million (R3 billion) provision at 30 June 2024. This was announced in the group’s full-year results posting in September 2024.
‘Strong legal arguments’
“We strongly disagreed with the judgment and immediately sought to appeal to the UK Supreme Court,” Markos Davias, FirstRand CFO, said during the group’s results presentation on Thursday morning.
“The appeal will be argued by an eminent King’s Counsel, supported by a strong UK legal team. The FCA and the National Franchise Dealers Association will also submit written and oral arguments.”
FirstRand is of the view that it has strong legal arguments that challenge the Court of Appeal decision and raise numerous complex principles of law, which will be decided by the Supreme Court in relation to the sets of facts and evidence before it.
According to Davias, the lender has taken “multiple potential redress scenarios” into account, including judgments of potentially compensatory interest rates, and costs to remediate.
“FirstRand has not raised a further provision, which is appropriate given the fact that the case is going to the Supreme Court,” he says.
The FCA also undertook to give an update on its probe in May, and the lender may need to raise a further provision in June 2025.
Investec, which is also affected by the probe, indicated last year that the group would maintain its R684 million provision for possible compensation. CEO Fani Titi told Moneyweb that the group considered the amount relevant but emphasised that new developments would be taken into account.
Disclosure of commissions
Vilakazi explained that the FCA’s regulatory review, which began in 2021, focused on discretionary commission arrangements that could have been detrimental to customers.
“Car dealerships earned commission, including on the interest rates that customers paid on their car loans. This was an incentive to raise interest rates because it increased commission,” she says.
“Due to these concerns, regulators banned discretionary commission agreements in 2021.”
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However, the court ruling in October went further, focusing on the disclosure of commissions.
“The court was basically saying the commission must be repaid [by the bank] to the customer, which is not correct. The dealership must repay the commission. The bank can reimburse for the higher rate. These are things that need to be clarified,” Vilakazi notes.
Investors and shareholders do not like uncertainty, she adds. “There are big numbers going around. If you take the court judgment – and you include commission – those numbers are massive.”
It has previously been estimated that the potential compensation costs for the industry could be anywhere between £2 billion and £10 billion (approximately R46 billion and R229 billion).
Vilakazi says she takes heart from the fact that the UK Treasury has also intervened in the matter in what is perceived to be an attempt to mitigate the financial risks for lenders and to ensure market stability.
Lenders have warned that the potentially astronomical claims could have far-reaching consequences for the industry and cause many businesses to shut their doors.
Vilakazi points out that FirstRand’s motor vehicle finance business represents just 10% of group earnings.
“This matter is ring-fenced. Our business is doing well – 90% of the engine for earnings are not impacted. We’ll get through this.”
