FNB hits a pothole in UK court

• SA banking group to appeal against judgment that its London branch paid car dealers unlawfully and without customers’ knowledge

SA’s most valuable banking group, FirstRand, was dealt a blow by a UK court that found it paid commissions to car dealers unlawfully and without customers’ knowledge.

The company is set to pay out more legal fees, which have already breached the R300m mark, as it defends the lawsuit that exposes it to a potential R3bn liability.

FirstRand, whose stock weakened nearly 3% on the JSE on Friday, said it would appeal against the decision of the UK Supreme Court.

The group said: “FirstRand is concerned by the judgment and does not agree with its findings.” The court “found that the London branch intentionally included the commission disclosure in the terms and conditions in a way that it would be unnoticeable to the customer and appears to have taken steps not to make the customer aware of the commission”.

“FirstRand also does not agree with the judgment’s finding that motor dealers owe a fiduciary duty to a customer (like a trustee or a director of a company might do). Lenders and motor dealers have always operated on the basis that the dealer functions on an arm’s length basis and has a primary objective to sell a motor vehicle, and therefore does not owe a duty of loyalty to the customer.”

UK lender Close Brothers, which was found guilty alongside FirstRand, also said it would challenge the judgment.

FirstRand, worth about R450bn on the JSE, has already made a provision of R3bn in possible penalties in the Financial Conduct Authority (FCA) investigation regarding dealer commissions in the motor finance sector in the UK. FirstRand said in September that it had already paid about R300m in legal and professional fees relating to the investigation.

The Mary Vilakazi-led group said that its appeal would argue that motor dealers do not owe customers fiduciary duties or any other duty around providing advice, recommendations or information on an impartial basis. The lender will also try to persuade the court that when lenders make disclosures regarding the possibility of payment of commission in the terms and conditions of their finance agreements, signed by the customer, it cannot be said that the commission has been hidden or kept secret.

“This judgment finds that a fiduciary duty suddenly and retrospectively now likely applies to all providers of credit at point of sale which has far-reaching and materially negative implications for the motor finance industry and broader consumer finance sectors in the UK.

“Given the importance of this issue, FirstRand believes these matters should now be heard by the UK Supreme Court, which only considers matters of law with wider public importance,” said the banking major.

“FirstRand has engaged with its regulators in both the UK and SA to explain its legal position and its view on the far-reaching negative consequences of this judgment. The group will continue to defend its position and undertake to update shareholders as and when it is able to provide further clarity.”

The FCA said that it took note of the judgment against FirstRand and Close Brothers.

“In January, we introduced a pause to the time firms have to provide a final response to customers about motor finance complaints involving a discretionary commission arrangement,” it said.

“We did this to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market while we review whether motor finance customers have been overcharged because of the past use of discretionary commission arrangements.

“In September, we extended the pause, in part, so we could account for the outcome of legal cases that may be relevant to our review. We note the Court of Appeal judgment on October 25 in Johnson vs FirstRand, Wrench vs FirstRand and Hopcraft vs Close Brothers, and are carefully considering its decision.”

Another SA bank caught up in the sweeping investigations by the FCA is Investec. The Anglo-SA niche banking and wealth management group has also set aside £30m for potential compensation and other costs related to the FCA probe.

The FCA is perusing thousands of records spanning 14 years, trying to figure out how the DCAs affected the cost of credit for people borrowing money to buy vehicles in the UK.

The watchdog banned the discretionary commission arrangements in 2021, after a review, saying that it would collectively save customers about £165m a year.

The Finance and Leasing Association, which represents car lenders in the UK, said that Friday’s court decision was flawed.

The association’s directorgeneral Stephen Haddrill said in a statement: “This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the FCA.”

THIS IS A SIGNIFICANT AND UNEXPECTED JUDGMENT, THE IMPLICATIONS OF WHICH STRETCH FAR BEYOND THE MOTOR FINANCE SECTOR