(Bloomberg) -- Investec Plc set aside £30 million ($38 million) to pay for possible compensation and other costs linked to UK regulators’ ongoing probe of its auto lending business.

The provision, tied to the Financial Conduct Authority’s ongoing review into historical motor finance commission arrangements and sales, boosted the South African lender’s overall costs in the year ending in March, according to a statement. 

The regulator has been reviewing the commissions arrangements for car loans, in a practice known as discretionary commission arrangements. The plan allowed car dealerships to earn thousands of extra pounds for themselves, and the bank, by pushing up the interest rate they offered buyers. The system, which the regulator banned in 2021, ultimately incentivized dealers to pick a higher rate for customers. 

Investec started its motor finance business in the UK in 2015 and it had grown to be a £555 million book of business by 2021, representing roughly 1% of market share, according to Ruth Leas, who leads Investec’s main banking subsidiary. The UK’s probe is focused on loans made up until 2021. 

“We feel that it is prudent to take a provision,” Leas said in an interview. “We acknowledge very clearly that there is significant uncertainty around this estimation and we will need to wait to see the outcome of the review later this year to see where the FCA lands on it.”

Investec is not the only South African lender caught up in the probe. 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, according to analysts at Anchor StockBrokers. That would represent about 13% of the company’s forecasted profits for its fiscal 2024 year, the analysts said in January. 

Lloyds Banking Group Plc, the UK’s biggest provider of car finance, has also set aside £450 million to pay for possible compensation and other costs linked to the car finance probe. Close Brothers Group Plc also said it expects to incur about £10 million in costs associated with the historical discretionary commission arrangements this fiscal year.

Investec’s provision comes after the Financial Conduct Authority last month warned motor finance firms to begin preparing for additional costs that may arise from its review of car finance products after lenders in recent months diverged on whether to take an immediate hit to earnings.

“We have observed firms taking different approaches to account for the potential impact on their financial resources of historic use of DCA arrangements that may have breached laws and regulations in force at the time,” the FCA said in a letter last month. “We are therefore writing to remind firms that they must maintain adequate financial resources at all times.”

Earnings Jump

Despite the provision, the bank’s earnings jumped as high interest rates boosted net interest income. The lender 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,” Chief Executive Officer Fani Titi said in an emailed note. 

Investec has spent recent years simplifying its business, including by spinning off most of its asset management holdings into a firm now known as Ninety One Ltd. and merging its UK wealth and investments unit with Rathbones Group. 

As a result, Investec offered new medium-term targets, including a goal of boosting its return on equity to as high as 17% and the company also vowed to boost its dividend payout policy to 50% of adjusted earnings per share, up from 35% previously.  

(Updates with comments from UK CEO, medium-term targets)

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