Responsible lending is the key to litigation funding in family law cases

In his The Law Society Gazette piece, John Hyde reported on the investigation by the Solicitors Regulation Authority (SRA) into complaints about the funding of family law cases by litigation funder Novitas.

Novitas stopped lending on new cases at the end of last year, but the issues highlighted in the feature have triggered a nervousness in the market generally. While some response to this headline was inevitable, family solicitors must be careful not to respond disproportionately. Doing so might not be in the best interest of their client.

The SRA is quoted as acknowledging (and recent court decisions have confirmed), that third party finance has a legitimate place in legal services and an important role in access to justice. Without finance, particularly where they do not have the resources to pay for legal fees, but their former partner does, many would not be able to get the advice and representation they need to achieve a fair outcome.

While litigation finance is here to stay, it is of course essential that every step is taken to ensure that borrowers are protected. More so given the vulnerability of some borrowers. Responsible lending is the key to this.

Every responsible lender will review the ombudsman’s rulings and stress-test them against their own working practices to make sure that the possibility of similar complaints against them is minimised. We evolve when we learn from the mistakes of others.

How does Ampla Finance ensure borrowers are protected?

In the context of the lending model in which Ampla and our immediate peer group operate, borrowers have the protection of the Consumer Credit Act 1974, the Financial Services and Markets Act 2000, the Financial Conduct Authority and the SRA. In addition to this, there is often a partnership agreement between the lender and the solicitor setting out the terms and obligations of their professional relationship. A responsible lender will carry out background checks on every solicitor firm they engage with and will only transact when they are satisfied that the firm is reputable.

For Ampla, responsible lending also means looking at the proportionality of the solicitor’s budget and making sure that after the repayment of legal fees and loan interest (on conclusion) the borrower is left with an amount sufficient to meet their reasonable needs, in particular for housing. Where those needs cannot be met then a loan will not be offered. It is likely to be the principal loan, represented by the amount of the solicitors’ fees and associated costs of the proceedings, and not the loan interest that is the key factor when it comes to proportionality and ensuring needs are met.

Every Ampla finance borrower is obliged to seek independent legal advice (ILA) before signing any documentation. This is common market practice and an essential safeguard, which in Ampla’s case is reinforced by borrowers having access to this advice through a panel, where the arrangements are made direct rather than through their solicitors. They pay for this advice themselves and that is not rolled up into their loan. 

So, the reference in John Hyde’s piece to litigation funding being “unregulated” relates to a different model where the funder does not lend, but instead invests in litigation and bears both litigation cost and risk in return for a share of the proceeds in the event (only) of a successful conclusion. This unregulated, or self-regulated activity of litigation funding is reserved for sophisticated buyers of legal services, generally in the non-consumer market. Neither Ampla Finance nor any of its direct competitors operate in this market. We simply lend on the basis that we will be repaid, with interest, in due course from the settlement. 

What role does the lender, borrower, and solicitor play?

Essentially a tri-partite relationship exists in litigation funding – borrower (client) and their solicitors; solicitors and lender; and borrower and lender. Each has an important part to play in responsible lending and regulatory compliance and those responsibilities overlap.

Solicitors have a duty to be transparent with their clients about the costs involved in their case and how they are to be funded, including where relevant the option of third-party finance. This engages various aspects of the SRA’s Code of Conduct and care must be taken not to stray into areas that cause problems. Helping solicitors navigate this conversation with their clients is the reason Ampla produced its Guide to Litigation Funding and why Ampla commits time to working with family law solicitors up and down the country to improve practice around lending and protect borrowers. The guide covers the main issues that can arise, including the extent to which the details of the lending can be explained by the solicitor and what should instead be left to the ILA provider and/or a regulated discussion with the lender.

The relationship between solicitors and lender is vital. Although the lender must undertake an independent assessment of the appropriateness of any loan by reference to the individual circumstances of each borrower and the resources available, the information provided by the solicitors as to outcome is a key part of this task. It needs to be determined not only at the outset but as the case progresses. The agreement between lender and solicitor that governs their relationship includes a duty on the solicitor to advise of any change in circumstances that might affect the route to repayment.

The last of the interrelated three relationship strands is that between the borrower and the lender. It is the most important. The ultimate responsibility of the lender to the borrower is to ensure that the loan is appropriate and fair. As well as the ILA panel, borrowers have access to an online portal so they can monitor their loan at any time. Every time the borrower’s solicitor requests a draw down for fees, the borrower has to authorise it

In conclusion, litigation finance plays an essential role in creating a level playing field in family disputes. Lending comes with responsibilities for all concerned, but this is a heavily regulated area and there are clear checks and balances in place. Borrowers, solicitors, and lenders of course need to be conscientious, but the vast majority of lending runs smoothly and those who need litigation finance to get a fair settlement should not be deterred because of concerns arising from a small number of exceptional cases where sadly a borrower has been let down by their solicitor and their lender.