Legal Business Blogs

Preparing for the worst: legal costs spike as FTSE 100 sets aside £31bn

With corporate counsel consistently burdened by onerous cost constraints levied by their executive, the pressure to deliver efficiencies in-house may prove greater than ever. Newly-released data shows FTSE 100 companies have set aside £31.3bn in the last year for legal provisions, a rise of 22% from £26.5bn the year before.

Published by Thomson Reuters this week (26 September) the legal provision set aside by listed companies represents expected legal costs, regulatory fines and compensation ordered by the courts.

In particular, the financial services sector’s anticipation of further hikes in disputes and fines contributes towards much of the sharp rise, with ongoing hurdles faced by UK-listed banks including claims in relation to Libor and Forex manipulation, ponzi schemes, manipulation of energy markets and of precious metal prices and PPI mis-selling.

As such, the banking sector now accounts for 56% of the total provision for legal liabilities among FTSE 100 companies, up from 54% in 2014. Meanwhile, the natural resources sector (oil and gas, and mining companies) falls in second place for anticipated legal liabilities, constituting 25% of the £31.3bn total, with legal provisions of £7.9bn.

The research also reveals a fivefold increase in legal provisions within the construction and materials sectors, which represented the steepest percentage rise from £54.1m in 2014 to £251m in 2015. Investigations into anti-competitive behaviour drove up legal provisions for FTSE 100 listed leisure and tourism companies, by a hefty 150% to £288.7m in 2015 from £115.7m the year before.

Further indications of the scrutiny faced by listed UK companies stems from the total of 16 FTSE listed companies reporting major legal provisions of £250m or more.

Margaret Cole, chief risk officer and general counsel at PwC, told Legal Business that ‘professionalising risk functions’ in-house is the way forward to safeguard against crises in the future. ‘We have an opportunity here which we must grasp. Risk leaders themselves must work out how to operate in a more efficient way which no doubt involves use of technology, new thinking, and clearer ways of approaching problems. Those functions need to think how they can operate in a more agile way in the world where this role has become externally facing.’

Cole (pictured) added ensuring the appropriate level of compliance in-house is key so as not to stifle innovation, and said: ‘The financial services sector has a lot of compliance issues to deal with – clearly getting that right is a balance because you don’t want the business to be overwhelmed. We don’t want people focusing on it where you lose the spirit.’