SSB: Sign of a systemic problem?
The government needs to urgently investigate the type of litigation funding used by collapsed law firms like SSB Law and Pure Legal, the Civil Justice Council (CJC) said yesterday.
This should consider “whether issues concerning portfolio funding require regulatory reform of the legal profession”.
The CJC also said such funders should be regulated by the Financial Conduct Authority (FCA) and consideration given to it co-regulating law firms using their money with the Solicitors Regulation Authority (SRA).
We detailed yesterday the recommendations of the Civil Justice Council (CJC) litigation funding report, which focusing mainly on backing for specific cases. But its scope extended to what it called portfolio funding – where law firms draw down funding to run a large portfolio of consumer claims.
“The working party considers that portfolio funding raises significant concerns… The risk that the consultation responses highlight – to consumers, the legal profession and its regulation – indicate a need for intervention,” it said.
“That such funding lies behind regulatory investigations by the SRA and LSB [Legal Services Board] further supports this conclusion.”
We reported in April about the SRA’s concerns that relationships with litigation funders were destabilising some high-volume consumer claims law firms.
The CJC working party’s consultation highlighted fears that the collapses of SSB Law and Pure Legal were “examples of a much wider systemic problem”, namely that “law firms have, through securing portfolio funding, developed high-risk and unstable business models that depend on unrealistically high levels of return”.
There were worries about the ultimate source of such funding, the extent to which lawyers vet potential claims, whether clear explanations of the nature of the funding and after-the-event (ATE) insurance have been given to clients, and the manner in which potential clients are identified.
The working group heard doubts about the legal profession’s ability to regulate these matters effectively.
It recommended that portfolio funding ought to be regulated as a form of litigation loan.
“In essence it is a loan, which provides law firms with working capital to finance litigation. It should be regulated as such and regulated by the FCA.
“As with litigation funding, it should be subject to anti-money laundering regulation, not least given the concerns raised with the working party about the provenance of such funding in some instances.
“Again, as with litigation funding, funders providing portfolio funding should be required to maintain sufficient capital adequacy.”
More broadly, the working party said it was concerned about regulation, particularly of the legal profession, “not least if and to the extent that it is correct that cases such as SSB Law and Pure Legal are evidence of a wider, possibly systemic, problem within part of the legal profession”.
While noting the work of the LSB and SRA, the report urged the government to investigate the issues raised by portfolio funding and its impact on the legal profession and its regulation “as a matter of urgency”.
It also called on the LSB and SRA to consider greater co-operation with the FCA. “In this regard, consideration should be given to the introduction of co-regulation by the SRA and FCA of portfolio funded law firms.”
The working group said it wanted to see portfolio funding “made available to and utilised by law firms prudently and responsibly”, with clients “fully informed about such funding and the risks and benefits it provides to them” and that it could not be used in ways “that promote unmeritorious litigation such as that evidenced by the SSB Law collapse”.
The consultation raised concerns about litigation loans as well, i.e. loans provided to individuals to help them finance litigation. These are particularly prevalent in divorce and probate matters.
These “reinforce the need in this area for effective financial services and legal services regulation and for steps to be taken to improve both where they have been seen to be lacking”, the CJC said.
“It also highlights the need for consumers to be fully informed of the nature of such funding and the responsibility of SRA to ensure that law firms comply with effective consumer information and client care duties.”
At least 15 consumer claims law firms have gone bust in the last five years owing more than £400m, a leading ATE insurer said in April, predicting that poor practices in the sector would likely lead to more.
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