FTSE 100 financial companies had to pay £12.6bn to settle legal and regulatory disputes last year — an 18 per cent annual increase and a sum that now makes up more than half of the total liabilities of groups in the index.
British banks have faced an onslaught of penalties in recent years for offences including manipulation of Libor, forex, Isdafix and precious metals rates, mis-selling payment-protection insurance, money-laundering violations and client money failings.
While companies expected an increase in litigation and higher fines for the banking sector following the financial crisis, the sheer scale of the penalties wasn’t expected, according to a report that analysed the costs that FTSE 100 companies have outlined in their annual reports as of the end of 2014.
“The cost of litigation was once seen as just a cost of doing business,” said Raichel Hopkinson, the head of the practical law dispute resolution service at Thomson Reuters, which conducted the research. “But in the last few years a succession of FTSE 100 and Fortune 500 companies have had to raise new capital, suspend dividend payments or dismember their empires in order to pay fines or restitution orders.”
The world’s biggest banks are facing increasing pressure to control compliance and regulatory costs from investors, analysts and some executives, as regulators are more focused than ever on compliance.
In the most recent batch of billion-dollar penalties, six banks were fined $6.5bn over rigging of foreign exchange markets in May. Four banks also agreed to plead guilty to conspiring to fix prices and rig bids in the $5.3tn-a-day forex market. The penalties brought the total that banks have paid in fines and settlements since 2008 to more than $160bn.
“This is now the era of the billion-dollar fine,” the report said. It is not just in Britain, either. “UK-listed banks are also now being hit by a new class of fines from overseas regulators and enforcement agencies running into the hundreds of millions of pounds.”
At the end of 2014, companies on the FTSE 100 index faced liabilities of £24bn, up from £18.1bn at the end of 2011. Without the effect of the costs for BP over the Deepwater Horizon spill, liabilities were £21.2bn last year, a steady increase from the £10.9bn in legal costs in 2011.
Companies set aside £239.5m on average, though the provision for companies outside the banking sector are half of that. Of the FTSE 100, 16 members reported legal and regulatory liabilities of £250m or more. They include four banks, two in oil and gas, two in mining, and one company in each of the pharmaceuticals, food and drink, telecoms, aerospace, retail, tobacco and engineering sectors, the report said.
Banks are expecting further penalties over manipulation of energy markets and precious metal prices, anti-competitive behaviour over credit default swaps, anti-money laundering and sanctions failings, tax-related litigation, client losses associated with dark pools and high-frequency trading, and further litigation costs from Libor and forex-rigging cases, according to the research.
“The rising number of complaints to the Financial Services Ombudsman about packaged fee-paying accounts that include insurance could also put these products under the regulators’ spotlight,” the report said.
Some banks have responded to increasing legal costs by hiring from the enforcement agencies to advise them. Standard Chartered has added Frances Townsend, a former assistant to the US president for homeland security and counterterrorism, and Boon Hui Khoo, a former president of Interpol, as senior external advisers to its board financial crime risk committee. Bill Hughes, the former head of the UK Serious Organised Crime Agency; Dave Hartnett, the former head of HM Revenue & Customs; and Sir Jonathan Evans, the former head of MI5, have joined HSBC’s financial system vulnerabilities committee.
After banking, the largest legal provisions were set aside by the oil and gas and mining sectors, which budgeted £3.8bn and £2.6bn, respectively. FTSE 100 pharmaceutical companies increased their legal provisions last year by 8.6 per cent to £731.7m to face increased global scrutiny around antitrust issues and litigation over intellectual property, sales practices and product liability.