UK Companies Face Increasing Number of Regulatory Inquiries

  • Four in five UK companies have seen an increase in the number of regulatory inquiries over the past three years
  • Average annual litigation spend for UK companies now stands at over US$2.10 million

Fulbright's Fourth Annual Litigation Trends
Download Fulbright's Fourth Annual
Litigation Trends Report

LONDON, UK – UK companies are seeing significant increases in the number of internal and external regulatory investigations according to a report(1) published today by international law firm and litigation heavyweight Fulbright & Jaworski. However, the number of court actions filed against companies appears to be down with 38% of UK companies seeing no court proceedings brought against them in the last 12 months, compared with 17% of US businesses that saw no litigation brought against them.

Increase in regulatory matters seen in the UK

Findings from the 2007 Litigation Trends Survey, which interviewed over 300 companies in the UK and US, reveal that over half of UK companies (54%) said they had had one or more internal investigations in the past year while nearly four in five (78%) of UK corporates said they had seen an increase in the number of regulatory inquiries / investigations over the past three years.

Consequently – given this increase in regulatory inquiries – regulatory matters top the list of greatest concerns for UK companies, cited by over half (53%) of all UK respondents. The second greatest concern for UK companies is securities litigation, actions relating to the corporate governance of companies often brought by activist shareholders, and then labour/employment matters. These concerns contrast markedly with the US where labour/employment, contracts and personal injury issues are ahead of any regulatory concerns.

The number of companies involved in either internal investigations requiring outside external counsel or external regulatory inquiries or investigations showed a divergence between US and UK companies. The UK companies experienced significant increases in both categories; whereas the US companies saw declines.

Chris Warren-Smith, Head of International Financial Services Disputes at Fulbright & Jaworski, commented:  “The UK appears to be catching up with the US in terms of exposure to regulatory matters, and in particular the increase in the number of corporate investigations over here would appear to mirror the US situation that we witnessed during the stock market downturn five or six years ago. 

“Whereas regulatory inquiries have recently quietened down in the US, we’re seeing UK companies over here citing regulatory matters at the top of their list of litigation concerns. Just two years ago we were seeing UK businesses stating employment and labour disputes as their greatest concern.”

UK companies are likely to spend more on regulatory matters, with 11% reporting annual expenditures of US$5 million or more. Just 5% of US companies were in this upper range of regulatory costs. UK financial services organisations are the most likely to spend over US$5 million, with 11% stating they spent this amount, followed by 8% of insurance companies.

Chris Warren-Smith, commented:  “This may be a sign of the impact that the UKregulatory bodies’ move from rules-based to principle-based regulation is having on the UK’s spend on regulatory matters. The UK is increasingly moving towards principle-based regulation which puts more onus on the participation of corporates themselves and the professional services companies that advise them. This may be resulting in increased expense.”

Interestingly UK companies are seeing increasing numbers of inquiries from the SEC, the US regulatory body. In 2006, less than a quarter had received inquiries, however in 2007 this had jumped to 81%. The SEC also appears to be targeting smaller and mid-sized companies with a considerable jump from 18% of this group receiving SEC inquiries in 2006 to 62% in 2007.

The report also reveals that UK businesses are finding themselves under increasing pressure to waive lawyer-client privilege, with 38% of companies having agreed to waive privilege in the past 12 months in order to avoid more severe action by enforcement authorities.

Antony Corsi, a Senior Associate at Fulbright & Jaworski commented: “Companies find themselves in a difficult position as a result of the perceived regulatory environment, as well as their desire to be as helpful as possible to their regulators, whilst protecting their legitimate rights.”

The increase in regulatory issues may also explain the substantial increase in the number of UK companies with litigation hold policies in place, which has increased from 62% in 2005 to 96% in 2007.

Litigation exposure

The number of court proceedings issued against companies appears to be down from 12 months ago, returning to levels similar to 2005. As a result, only one in five respondents in both the USand the UKexpects more litigation in the year ahead. However, actions with US$20 million or more at stake are on the increase. Of the smallest companies in the survey, 17% reported at least one court action of that magnitude in the last year.For the largest companies (over US$1 billion gross turnover), 80% had up to 20 lawsuits in the US$20 million or more range. 

Lista Cannon, Partner in Charge of Fulbright & Jaworski’s London office, commented: “The upper end of the litigation market remains strong. We are seeing the effects of the credit crunch feed through into the disputes arena, and the increasing use of third party litigation funding”.

The report indicates that there was an increasing number of settlements prior to final court or arbitration hearings, with about 70% of the total survey sample saying that about half or more of the actions that their companies initiated last year ended in settlements. Predictably, smaller companies with gross turnovers of under US$100 million are more likely to settle through mediation before the commencement of proceedings than larger companies. 

Litigation and legal spend

Almost a quarter of all UK and US respondents had annual total legal spending of US$10 million.  Litigation costs continue to differ considerably between the UK and US. The average litigation spend by UK companies is US$2.10 million compared with US$3.59 million by US companies. UK financial and insurance organisations spend more than other industries, with the average spend standing at US$2.84 million. US companies were nearly twice as likely as their UK counterparts to spend US$5 million or more on litigation (19% versus 10%). 

In terms of preferred billing arrangements, fixed fees continue to be the client’s preferred alternative to standard hourly fees, cited by 42% of all survey respondents, and 67% of UK businesses. However despite their popularity with clients, half of all respondents use fixed fees, but of those, most use them rarely.

E-discovery and litigation hold policies

Issues relating to e-discovery remain a very rare or nonexistent event for 70% of all businesses surveyed, with no increase on 12 months ago. Two in five (40%) of the largest organisations said that they sometimes or frequently experienced issues related to e-discovery in their litigation matters. However, there was some increase cited in the number of e-discovery issues by small and mid-sized company respondents, which would indicate that e-discovery is spreading to businesses of all sizes. More companies are considering or actually retaining e-discovery specialist lawyers to deal with actions, 42% stated this was a consideration compared with 17% in 2006.

Another consideration for businesses who may be called to provide information in relation to e-discovery concerns the increasing use of electronic channels for corporate communication. The majority of respondents (72%) permit employees to access their company network from home and just under a half (48%) allow the use of external email accounts, such as Hotmail and Yahoo, from company computers. 

Instant messaging would appear to be increasing in popularity with over half (54%) of companies permitting this; however, just 31% log or retain any instant messaging. Only slightly more (40%) retain voicemail.  

The backup retention period varies significantly between companies, but the median for all companies in the survey is approximately 60 days, with the industries most likely to retain communications for a year or more being real estate, technology / telco and energy. Two in five of all respondents (40%) say they now have a chief privacy officer.

Other types of litigation

Although class actions have not taken off in the manner that many commentators predicted a couple of years ago, the class action net appears to be growing broader as more companies are likely to have at least one class action pending. Unsurprisingly, it is US companies that have had the most exposure to class actions with 60% facing at least one class action. Just 5% of UK companies had class actions pending in the US.

Companies that are at risk from patent infringement claims have reported an increase in the number of such claims received. The industries most likely to have received patent claims in the last three years include manufacturing, retail/wholesale and technology/communications.

About the report

¹Fulbright & Jaworski 2007 Litigation Trends Survey is an independent survey of senior corporate counsel.  Now in its fourth year, the report surveyed 303 companies (from a wide range of industry sectors).  For further information or to request additional analysis on specific topics please contact Partner in Charge Lista Cannon (lcannon@fulbright.com or + 44 (0) 20 7010 8301), Partner Chris Warren-Smith (cwarren-smith@fulbright.com or + 44 (0) 20 7010 8304) or Senior Associate Antony Corsi (acorsi@fulbright.com  or + 44 (0) 20 7010 8359) at Fulbright & Jaworski International LLP, 90 Long Acre, London WC2E 9RA.

About Fulbright & Jaworski

Opening in 1972, Fulbright & Jaworski’s London office  serves as the base for the firm’s UK and European practices in international arbitration, transnational disputes and commercial transactions.

Fulbright & Jaworski ranks among the top litigation and disputes firms in the world. Founded in 1919, Fulbright is a leading full-service international law firm, with close to 1,000 lawyers in 17 offices.

The firm has over 450 disputes lawyers worldwide. Core areas of practice include litigation, arbitration, regulatory enforcement and corporate investigations. Fulbright is ranked among the top ten arbitration firms worldwide in the 2007 ALM Focus Europe.

Lista Cannon, who heads up Fulbright’s London office, is a dual-qualified lawyer and was nominated in the top 15 of The Financial Times’ Special Report 2006 on Innovative Lawyers for making significant contributions to international financial regulatory investigations.

For more information, visit www.fulbright.com.

FOR PRESS ENQUIRIES: 

Sarah Rowan, Citigate Dewe Rogerson, 3 London Wall Buildings, London Wall, London EC2M 5SY, +44 (0) 20 7282 1049 or sarah.rowan@citigatedr.co.uk.