Footsie companies brace for £25bn fines and legal costs

Banks massively increased their reserves for paying fines and litigation last year in a sign that despite the plethora of scandals that has already broken over the financial industry the sector is expecting still more pain.

Financial firms pushed their combined expected legal liabilities to £9.22bn in 2013, up 43 per cent on the previous year, according to an analysis by Thomson Reuters. The large four UK banks – Royal Bank of Scotland, Barclays, HSBC and Lloyds – earmarked a further £2.5bn to cover the cost of settling claims by customers and regulatory fines.

Last week RBS revealed a further £3bn provision, which is expected to push the 81 per cent state-owned bank to an £8bn loss for the 2013 year. The bank said this sum was to cover litigation and other claims relating to toxic mortgage-backed securities it offloaded before the financial crisis, as well mis-sold payment protection and interest rate hedging products.

Raichel Hopkinson, head of the Practical Law Dispute Resolution Service at Thomson Reuters, predicted banks were likely to have to set even more aside in 2014. “The Government’s plans to reform the UK consumer law regime and the possibility of smaller claims being aggregated to secure third-party litigation funding may encourage more claims against banks – and a continuing need for increased legal provision,” she said.

Other large firms also increased their provisions for various legal costs last year. Across the FTSE 100, companies set aside 12 per cent more, taking total provisions to £24.6bn. After banks, the biggest increases came in the energy sector. Oil and gas companies raised provisions for regulatory and legal action by 40 per cent. The biggest driver was BP, which recently lost a court case to limit its pay-outs to businesses affected by the 2010 Gulf of Mexico spill.