£31.3bn set aside by FTSE 100 as legal bills continue to soar

According to legal analysts at Thomson Reuters, the provision represents expected legal costs, regulatory fines and compensation ordered by the courts, for example, for PPI mis-selling and Deepwater Horizon.

The financial services sector’s anticipation of a further hike in law-suits, fines and compensation is behind much of the sharp rise, with banks seeing the largest increase in provision for legal liabilities, up 27 per cent to £17.4 billion from £13.7 billion.

The increase means that the banking sector now accounts for 56 per cent of total provision for legal liabilities among FTSE100 companies (up from 53.6 per cent in 2014).

The natural resources sector (oil & gas and mining companies) accounts for the next biggest slice of anticipated legal liabilities: 25.1 per cent of the £31.3 billion total, with legal provisions of £7.9 billion.

Shareholders in the UK and European banking sector have continued to express surprise at the high level of legal provision that banks are making, so long after the banking crisis – the event which is seen as triggering many of the current claims.

The Royal Bank of Scotland (RBS), for example, named pre-financial crisis mortgage securitisations and interest rate trades – including potential associated legal costs – as a major contribution to the banks’ £1.9 billion loss in 2015.

Other on-going legal and regulatory disputes being faced by UK-listed banks include claims in relation to:

Similarly, even though 2015 saw BP reach a settlement over its 2010 Deepwater Horizon crisis, the company’s litigation provisions in connection with the incident have continued to grow.

“In the last twelve months regulators have continued to come under pressure from the government to promote and enforce a culture of compliance and accountability. Imposing punitive fines on non-compliant banks is a big part of this,” explains Raichel Hopkinson, head of the Practical Law Dispute Resolution Service at Thomson Reuters.

“However, the tens of billions of pounds that banks have had to pay in legal bills since 2007 is only one part of the price paid for misconduct.

“The extremely long and thorough public investigations being carried out into suspected transgressors are also incredibly damaging from a reputational point of view. In the long term, the impact of reputational damage may be far greater than any fine or compensation payment,” adds Hopkinson.

Thomson Reuters says that there may be signs that legal and regulatory costs for banks are peaking –with many credit crunch and PPI claims approaching their time bar and with some regulators, such as the FCA, suggesting they may take a less aggressive approach to regulation.

The steepest percentage increase in provision for legal liabilities was amongst construction and construction materials companies. Companies within these sectors increased their total legal and regulatory provisions fivefold from £54.1 million in 2014 to £251 million in 2015.

Notable cases affecting the construction and construction materials sectors include fines and costs following action taken by the Swiss Competition Commission against CRH.

In addition, investigations into anti-competitive behaviour helped drive up legal provisions for FTSE100-listed leisure and tourism companies – which rose by 149.5 per cent to £288.7 million in 2015, up from £115.7 million the year before.

Other legal issues facing the leisure and tourism sector include on-going group employee holiday pay and age discrimination claims.

A total of 16 FTSE100 reported substantial legal provisions of £250 million or more is a further indication of the scrutiny under which UK-listed companies are operating.

“While worries remain that regulation could be becoming too burdensome, we are seeing listed companies change their behaviour as a result of stricter rules,” adds Hopkinson.

“Increasing pains are being taken to improve internal compliance functions and to put compliance front and centre of the business.

“Companies continue to invest heavily in their in-house legal teams– and compliance teams are seen as wielding as much authority within corporates as they ever have.”