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FTSE 100 firms set aside £31bn as legal bills rise

Companies continue ‘heavy investment’ in in-house legal and compliance teams

26 September 2016

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FTSE 100 companies have set aside £31.3bn to meet legal claims over the last 12 months, a 22 per cent increase on the previous year as in-house lawyers and compliance experts ‘wield more power than ever’ before, according to new research.

The hoarding of cash represents expected legal costs, regulatory fines, and compensation for claims such as PPI mis-selling and the Deepwater Horizon disaster.

The financial services sector’s anticipation of an increase in law-suits, fines, and court awards is behind much of the sharp rise, according to Thomson Reuters’ Legal Business division, with banks seeing the largest increase in provision for legal liabilities, up 27 per cent to £17.4bn.

The hike means the banking sector now accounts for 56 per cent of total provision for legal liabilities among FTSE 100 companies, a 2.4 per cent rise from 2014.

Separate research from Thomson Reuters found that banks made up the largest share of High Court cases involving FTSE 100 companies in the year to June 2014, while research from RPC found that the sector was under pressure to assist the Financial Conduct Authority with overseas information requests.

On-going legal and regulatory disputes faced by the banks include claims in relation to LIBOR and FOREX manipulation, Ponzi schemes, manipulation of energy markets and precious metal prices, and PPI mis-selling.

Oil and gas and mining companies accounted for one quarter of the anticipated legal liabilities, with legal provisions totalling £7.9bn.

As an example of ongoing claims, BP’s litigation provisions connected with 2010’s Deepwater Horizon disaster continue to grow, despite the company reaching a settlement in 2015.

‘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,’ explained 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,’ she added. ‘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.’

Legal and regulatory costs for the banks may be about to peak, however, with limitation issues expected to affect many credit crunch and PPI claims.

The steepest percentage increase in provision for legal liabilities was among construction and construction materials companies. Businesses within these sectors increased their total legal and regulatory provisions fivefold from to £251m in 2015.

Notable cases affecting the sectors include the €32m fine and costs following action taken by the Swiss Competition Commission against CRH.

In addition, investigations into anti-competitive behaviour drove legal provisions upwards for FTSE 100-listed leisure and tourism companies, up 149 per cent to £288.7m. Other issues facing the sector include on-going group employee holiday pay and age discrimination claims.

A total of 16 FTSE 100 reported substantial legal provisions of £250m 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,’ said 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.’

In August, Solicitors Journal reported on how banking litigators and regulators are set to be the big winners post Brexit as demand for their services increases in the shadow of the UK’s vote to leave the European Union.

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Funding & Costs Litigation Financial services & Tax In-house

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Financial Conduct Authority Thomson Reuters FTSE 100 Compliance In-house