FTSE 100 companies’ legal liabilities jump by 12 percent in 2013
Recent analysis by Thomson Reuters concludes that the legal liabilities reported by FTSE 100 companies climbed 12 percent in 2013 to £24.6bn ($42bn) up from £22.1bn ($37bn) in the previous year. This increase has been driven by a sharp jump in legal provisions in the banking industry, with legal costs for banks rising by 44 percent in 2013. Legal provisions by banks now make up 37 percent of the total legal provisions for companies in the FTSE 100, up from 29 percent last year.
“There is a perception that regulators and government have responded to public pressure to show no mercy for large corporations that have been caught breaching laws and regulations,” says Raichel Hopkinson, head of the Practical Law Dispute Resolution Service at Thomson Reuters. “Businesses hope that as the UK economy grows and memory of the recession fades that they will face lower levels of legal risk but that hasn’t happened yet. With legal risk going from being a minor annoyance to a threat to balance sheets, it is not surprising that in-house legal teams are being given more resources and authority and are being asked to report directly to the board.”
The largest single sector for legal liabilities remained the oil & gas industry, representing 40 percent of provisions, while the mining sector represented 7.5 percent of reported legal liabilities.
The large jump in reported legal liabilities in the banking industry was driven by an increase in the cost of settling claims by customers over the mis-selling of interest rate hedging products, along with a recent surge in fines handed out by financial regulators and government agencies.
In 2013, the big four UK banks set aside nearly £2.5bn ($4.2bn)– more than a quarter of all banking sector legal liabilities – to cover the cost of settling claims by customers over the mis-selling of interest rate hedging products. This followed an FCA ruling that the banks had mis-sold interest rate hedging to about 40,000 small businesses, forcing them to conduct internal reviews and fast-track compensation.
On Jan. 27, Royal Bank of Scotland announced an additional £3.1bn ($5.2bn) in legal provisions to cover litigation and customer compensation claims, on top of the legal provisions set aside in 2013.
“RBS is yet another example of how a series of past mistakes can come back and haunt a company for years to come. Banks on both sides of the Atlantic are being hit by huge litigation costs, with some investors taken by surprise by the high legal provisions announced recently by other companies such as JP Morgan and Deutsche Bank,” Hopkinson says.
Oil & gas companies
The largest single sector for legal liabilities remained the oil and gas industry, representing 40 percent of all provisions, up from 37 percent last year. The total amount set aside for probable legal and regulatory action in this sector rose by 22 percent in 2013 to £9.9bn ($16.5bn) up from £8.1bn ($13.5bn) in 2012.
The nature of oil and gas extraction means that one disaster can force a company to make legal provisions worth billions of pounds. For example, 58 percent of the value of all oil & gas sector legal provisions in 2013 were as a result of the 2010 Gulf of Mexico oil spill.
Recently, BP failed in its US court attempt to curb the multi-billion dollar settlement between the oil company and businesses affected by the spill.
While one-off incidents can cost a company billions of pounds over a number of years, the consistently high level of legal provisions in the oil & gas sector can be attributed to on-going environmental and geopolitical factors in countries where the companies operate.