Investec Sets Aside £30M for UK Motor Finance Probe Amid FCA Scrutiny

Key Takeaway

• Investec Plc has set aside £30 million for potential costs related to the FCA's probe into historical motor finance commission arrangements.
• FirstRand Ltd. and Lloyds Banking Group Plc also face significant costs, with provisions of £319 million and £450 million respectively.
• Citigroup fined £62 million by UK regulators for a $1.4 billion trading error, highlighting ongoing issues with its trading controls.

Investec's Provision for Auto Lending Probe

Investec Plc has allocated £30 million ($38 million) to cover potential compensation and other costs related to the UK regulators' ongoing investigation into its auto lending business. This provision is linked to the Financial Conduct Authority's (FCA) review of historical motor finance commission arrangements and sales. The FCA has been scrutinizing discretionary commission arrangements, a practice that allowed car dealerships to earn additional income by increasing the interest rates offered to buyers. This system, which was banned in 2021, incentivized dealers to select higher rates for customers, benefiting both the dealerships and the banks.

Investec is not alone in facing scrutiny from the FCA. FirstRand Ltd., South Africa's largest bank by market value, is expected to incur costs of £319 million to address issues at its MotoNovo unit, according to analysts at Anchor StockBrokers. This amount represents approximately 13% of FirstRand's projected profits for its fiscal year 2024. Similarly, Lloyds Banking Group Plc, the UK's largest provider of car finance, has set aside £450 million for potential compensation and other costs related to the car finance probe. Close Brothers Group Plc also anticipates incurring around £10 million in costs associated with historical discretionary commission arrangements this fiscal year.

Despite the provision, Investec's earnings have surged, driven by high interest rates that boosted net interest income. The bank declared a record dividend of 19 pence per share, bringing the total dividend for the year to 34.5 pence per share. "This performance demonstrates the continued success in our client acquisition strategies," said Chief Executive Officer Fani Titi in an emailed statement.

Citigroup's Trading Error Fine

UK regulators have fined Citigroup £62 million for failing to prevent a $1.4 billion trading error that briefly disrupted European stock markets. The incident, which occurred in May 2022, was one of several over a four-year period where regulators found Citi's trading controls to be inadequate. The Financial Conduct Authority (FCA) imposed a £27.8 million fine on the US bank, while the Prudential Regulation Authority (PRA) levied a £33.9 million penalty.

The error occurred when a London-based trader intended to sell a basket of shares valued at $58 million but mistakenly created a basket worth $444 billion. Although Citi's internal controls blocked $255 billion of the erroneous trade, orders worth $189 billion were sent to a trading algorithm, resulting in the sale of about $1.4 billion of shares before the trader managed to cancel the order. This incident triggered a brief sell-off across several European markets during a typically quiet Monday morning trading session.

"Firms involved in trading must have effective controls in place in order to manage the risks involved. CGML [Citigroup Global Markets Limited] failed to meet the standards we expect in this area, resulting in today’s fine," said Sam Woods, Chief Executive of the PRA. The FCA noted that some primary controls were "absent or lacking," and there was no block in place to prevent such a large erroneous basket of shares from reaching the market. Additionally, the trader was able to manually override a pop-up alert without having to check which alerts were flagged, and Citi's real-time monitoring was ineffective, leading to a slow response to the trades.

In a statement, Citi said, "We are pleased to resolve this matter from more than two years ago, which arose from an individual error that was identified and corrected within minutes. We immediately took steps to strengthen our systems and controls, and remain committed to ensuring full regulatory compliance." This is not the first time Citi's systems have been compromised by human error. In 2020, the bank accidentally wired $900 million to creditors of cosmetics group Revlon, leading to a $400 million fine from US regulators for failing to correct deficiencies in its risk and control systems.

Street Views

• Analysts at Anchor StockBrokers (Bearish on FirstRand Ltd.):

  "FirstRand Ltd., the country’s biggest bank by market value, would likely face costs of £319 million to redress the issue at its MotoNovo unit."

Management Quotes

• Fani Titi, CEO of Investec Plc:

  "This performance demonstrates the continued success in our client acquisition strategies."