Does Litigation Funding need more regulation?

Opinions towards third-party-funding or litigation funding are slowly changing; once viewed as the dark side of the market, it is now looked on more favourably as tool to create symmetry on both sides of the table. If used effectively, litigation funding provides an equal playing field for businesses who find themselves in the position of David in David vs Goliath situations.

Historically, lots of organisations within the litigation finance market are global entities that used to ‘cherry pick’ the extremely large commercial litigation cases where millions of pounds are ‘loaned’ on an individual case. This has since changed and the market has gone a long way to change its perception within the industry, through self-regulation and increased client support. However, some within the legal sector still question whether some funders are ‘cowboys’ and whether the litigation funding sector is appropriately regulated. This article will break down myths that still plague the sector’s reputation and aim to provide clarity on some of the stickier points.

Myth one: there are set limits on the fees and interest rate funders can charge.

Litigation funders provide a service that is often to a distressed Client. The Client wishes to pursue a viable legal dispute but don’t have either cashflow or the will, in terms of risk, to finance the legal costs themselves due to the undetermined cost and undetermined time for a case to reach conclusion. This means that many funders will provide a tailored commercial solution that the Client will decide on, based on their own set of case circumstances and commercial objectives. The finance proposal will often take into consideration the size of loan required, the prospects of success, the expected case duration and of cause the potential settlement. Whilst in essence there maybe a typical market rate relevant to specific models, each case is financed in isolation and not currently subject to specific limits.

Many funders offer to provide finance encompassing an element of own costs, all disbursements and in some circumstances the advance costs of an after-the-event (ATE) insurance policy. The ATE policy provides indemnity against the risks of a losing case and the need to repay borrowed capital and the potential for adverse costs. Some ligation funders do not require the use of insurance; however, in return for this risk they will require a substantial percentage share of the awarded settlement.  Larger funders will often focus on ‘cherry picking’ cases that offer the best commercial return for their deployed capital, which leaves the SME market often under serviced. Recently Lawyers and their Clients having been given a greater choice following the emergence of a number of litigation funders who place more focus on the SME market, supporting loans typically between £250k and £2.5m.

Myth two: there are no specific legislative or regulatory provisions applicable to third-party litigation funding.

Whilst the commercial litigation finance market is not subject to any specific regulation in terms of providing commercial loans for the purpose of pursuing a legal dispute, it has gone to a huge effort to self-regulate. A number of large funders that focus predominantly on the multi-million-pound cases established the Association of Litigation Funders, and adhere to a voluntary code of conduct. Ultimately it is important that any Client is treated fairly and that there is absolute transparency in how much a litigation loan will cost them and whether that cost is proportionate to the settlement that they will receive if successful. It is always advised that when a Client is considering a litigation finance loan, that they seek independent advice on the terms of the loan, and any inherent risks

Myth three: there are no specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding.

Legal professionals are always obligated to act or advise in the best interests of their Client. This includes making them aware of the alternative ways of financing the legal costs of their case, and potential funders who could provide that finance. It would not be appropriate for any one funder to be promoted over another. This advice should be free from commercial influence and should place the onus on the Client to decide which funder if any would be suitable in their specific set of circumstances.

Law Firms are typically risk adverse and although some Litigation Funders will provide loans or facilities directly to the Law Firm, many Law Firms do not want such risks on their balance sheet so prefer loans to be provided to their Clients. It is necessary however for a Law Firm to demonstrate to the Client, and any potential funder, that not only do they believe in the merits of the case, but they are happy to share the risk in running the case by offering the Client a CFA based retainer. If a Law Firm is committed and invested in a case by way of deferred fees, it is far more likely that they will continue to support their Client positively and progressively throughout the case until conclusion. Many funders may not provide litigation finance if the Law Firm is not committed to the case in this way.

Litigation funding is an evolving creature and one that consistently tries to improve its services, with the support of the legal profession. Here at Quanta, we are increasingly taking a proactive approach to all parties involved in the litigation process so as to ensure that the approved cost schedule and communicated milestones remain consistent with the terms and expectations agreed at the outset. All parties are obligated to maintain regular communication of case progress and disclosure to ensure that the provided litigation finance remains suitable and / or viable. This said, litigation funders are not permitted to influence the outcome or settlement of case, subject to long standing Champerty legislation, which restricts any third party taking a commercial interest in a legal dispute.

By Simon Dawson, Managing Director at Quanta Capital Group

Simon Dawson, Managing Director at Quanta Capital Group – see here

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