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FirstRand, one of South Africa’s largest lenders, is putting its UK challenger bank Aldermore up for sale in response to plans laid out by the British financial regulator for a car finance mis-selling compensation scheme.
On Tuesday, FirstRand said the Financial Conduct Authority’s industry-wide £9.1bn redress scheme was “deeply flawed” and meant owning a UK consumer finance company was no longer “within the group’s risk appetite”.
FirstRand, which bought Aldermore for £1.1bn in 2017, said the “disproportionate and unfair” scheme had forced it to raise provisions for the motor finance scandal by £510mn to £750mn and cut its earnings forecast. It had initially set aside £127.4mn for potential claims, and added £115.1mn to that in September.
The move by FirstRand to sell Aldermore marks the first time a lender has decided to exit the UK motor finance business because of the FCA’s plans, and the strongest signal yet of banks’ anger.
Banks have criticised the regulator’s compensation scheme as being punitive and said it risked hurting investment in UK car manufacturing, even after the watchdog cut its estimate of the total cost for lenders.
“Cognisant of protecting shareholder value and ensuring Aldermore’s future success, the group will work with Aldermore’s board and respective regulators to facilitate an orderly ownership transition,” FirstRand said in a statement.
The group first became involved in UK car lending in 2006 when it bought MotoNovo Finance from the bank Julian Hodge, and it now has about a 10 per cent share of Britain’s motor finance market. Aldermore also provides other forms of finance, such as mortgages and business lending.
FirstRand said it now expects full-year “normalised earnings” to be 10 to 15 per cent lower because of the FCA scheme, which it previously said went beyond “expectations of what can be considered proportionate or reasonable”.
Close Brothers, another lender heavily involved in the mis-selling scandal, said on Wednesday that it expected the FCA compensation scheme would cost it £320mn. It said it was reviewing its previous accounting provision of £294mn.
The FCA last week gave full details of its redress scheme for the long-running motor finance scandal, which centres on commissions paid by lenders to car dealerships when they provided customers with loans.
The regulator and UK courts have said many of the commissions were insufficiently disclosed to consumers and often incentivised the charging of higher interest rates or were unfairly high.
The FCA scaled back the compensation scheme, reducing the number of people eligible for redress from 14.2mn to 12.1mn. It said the estimated cost for British lenders had dropped to £9.1bn, compared with the £11bn it forecast in initial proposals last October.
However, lenders have said the scheme is still overly onerous and does not adhere to a Supreme Court ruling last year which narrowed the potential fallout from the scandal.
The FCA said the scheme provided certainty and was “the most cost-efficient and orderly way to deal with liabilities that exist”, and that the cost to lenders of dealing with complaints through the ombudsman or the courts would be more than £6bn higher.
The regulator said the UK’s motor finance market “remains resilient” and attracted a record £41bn of lending last year.