RBS legal costs provision jumps 300% to almost £1bn

The Royal Bank of Scotland (RBS) has more than tripled its provision for future legal costs related to regulatory and legal actions to £952m, the bank’s annual report has revealed.

In 2015 RBS’s provision for spending on lawsuits and regulatory fines was £232m, up 27 per cent on the previous year when it set aside just £182m.

Now RBS has increased its provision by 310 per cent in 2016, ahead of a series of mega-fines in the UK, Europe and the US, and a raft of consumer and shareholder court actions.

The UK bank is expected to face the biggest fine in its history later this year in the form of an expected $10bn to $15bn bill by the US Department of Justice (DoJ) related to mis-selling sub-prime mortgages. It has been suggested that RBS could fight the fine in court when the final figure is revealed.

It is also currently embroiled in a major court case against shareholders stemming from its £12bn rights issue in 2008. Around 24,000 corporate and individual investors, represented by Signature Litigation, claim the rights issue was defective and contained “material misstatements and omissions”.

The claim will finally go to trial this May and is valued at around £1bn. Approximately £3bn of related claims against RBS brought by institutional investors including Lloyds Bank, Scottish Widows and Halifax Life were settled in December 2016.

RBS’s lawyers at Herbert Smith Freehills have already racked up in excess of £100m in legal fees for their work on the bank’s defence.

The bank’s annual report noted the case as “another legacy problem on the way to resolution”, adding: “We announced in December that we made an offer to affected shareholders to resolve that litigation and four out of five groups involved have already accepted it.”

The big jump in legal costs provisions comes amid an exceptionally bad year for RBS, which suffered a £7bn loss in 2016, more than three times as large as in the year before.

Included in the losses was litigation and conduct costs totalling just under £6bn.

The bank is two years into a three-phase strategy to strip away costs in its business and “unnecessary complexity”. Since 2014 it has “almost halved the number of legal entities” it controls, according to its 2016 annual report.

RBS also slashed its legal panel by around 40 per cent in 2012, scaling back its legal roster to around 60 firms, and has continued to reduce the size of its panel since then.

At the last panel review at the end of 2015, the bank asked all of its panel firms to freeze their rates in exchange for securing five years on the panel, up on the usual three-year term. However most firms pitching for the panel did not fall in line with the request and many pitched higher rates than their previous panel commitments.

Clifford Chance, Allen & Overy and Linklaters won three-year appointments to the bank’s top-tier legal panel at the start of 2016, alongside Herbert Smith Freehills, Norton Rose Fulbright, Macfarlanes, Reed Smith, DLA Piper, Pinsent Masons, Simmons & Simmons, King & Wood Mallesons, Dentons, Ashurst, Brodies and TLT.

Freshfields Bruckhaus Deringer and Berwin Leighton Paisner won spots on the bank’s customer transactional panel, allowing the firms to work for RBS clients.

RBS changed its general counsel at the same time as the panel review following the resignation of legal chief John Collins in December 2015, just 11 months after he stepped in to the top job. It hired Barclays veteran Michael Shaw as general counsel in March last year.

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