SSB: Went bust owing litigation funders over £200m
Law firms arranging or using third-party litigation funding for consumer claims will have to tell the Solicitors Regulation Authority (SRA) about it, under plans unveiled today.
The proposed rules would also require firms to provide clients with a ‘funding information document’ in a prescribed form and keep a ‘funding risk assessment’.
The SRA said new litigation funding requirements would be added to the Standards and Regulations for all solicitors, namely that when they arrange third-party funding for any type of claim, they must:
- Maintain independence from the funder;
- Act in clients’ best interests;
- Only disclose confidential information with informed client consent;
- Provide written confirmation to clients and funders of the above, and that the funder is not regulated by the SRA.
The consultation published today forms part of the SRA’s wider work programme to address concerns about how law firms are handling high-volume consumer claims (HVCC).
Third-party funding has been a significant feature in the collapses of SSB Law and Pure Legal; the SRA described it as “one of the areas of greatest harm and risk”.
Though only a tiny proportion of firms use it for HVCCs, regulatory returns indicate that the number of affected clients is around 11m.
“Our proposals will give us earlier visibility of emerging risks and strengthen our approach to ensure that when firms use this type of funding, they do so responsibly and in line with their professional obligations.”
The SRA said it also had concerns about the actions of some funders, such as that they may lack the appropriate expertise to assess the legal and financial risks of backing consumer claims work, “appear to have made funding commitments without having the necessary capital/liquidity to meet them” and may be at risk of being used by criminals to disguise proceeds of crime or avoid the UK sanctions regime.
It supported compulsory regulation of litigation funding, as recommended last year by the Civil Justice Council.
The definition of funding used by the SRA would exclude loans which are regulated consumer credit agreements, business loans or other forms of commercial credit provided by a bank or other financial institution, and funding provided by the law firm’s owner where they are authorised by the SRA.
At this stage, the definition of ‘consumer claim’ would exclude personal injury and clinical negligence – as the same patterns of harm are not present and the legal framework is mature – collective actions brought in the Competition Appeals Tribunal, which supervises them closely, and work defending claims.
The SRA said law firms handling consumer claims would have to provide clients “with a prominent funding information document”.
“This is intended to ensure each client has the information they need to make an informed decision, before signing a third-party litigation funding agreement in relation to a consumer claim.”
The regulator said it proposed to prescribe the minimum level of information contained in the document, including “the availability of free-to-use alternatives to pursue the claim”, such as ombudsman schemes and government redress schemes.
The document should set out whether there were other potential sources of funding, such as legal expenses insurance or conditional fee agreements, an estimate of the law firm’s fees and explanation of any success fee, how the funder’s return would be calculated and an estimate of the client’s likely damages if the claim was successful.
Solicitors and law firms would also have to notify the SRA “promptly when they use and/or arrange third-party litigation funding for consumer claims”, which would allow it to “conduct further enquiries where we have concerns about particular arrangements”.
They would need to make available to the SRA on request, their third-party litigation funding risk assessment, which would be completed before the firm receives any funding and the client enters any agreement.
The risk assessment would need to be “updated every six months and approved by the firm’s chief executive/managing partner (or equivalent) and compliance officers”.
Among the factors that should be assessed are the funder’s financial position – including capital adequacy and liquidity – whether it has any experience of the sector, whether the firm has carried out any due diligence on the funder, and the firm’s “financial position in relation to the proposed funding”.
The risk assessment should also include the firm’s legal assessment of the claim, the anticipated strategy of the defendant and a costs forecast.
Some law firms using litigation funding for consumer claims would be subject to a further requirement – keeping a “plan setting out how the law firm would achieve and resource an orderly closure of its business, if that were necessary”.
This too would need to be updated every six months and approved by the firm’s chief executive/managing partner and compliance officers.
It would apply only to firms using non-recourse funding for consumer claims and instructed by 500 or more individual claimants or where “the total funding provided (but not necessarily drawn down) is equivalent to, or greater than, 30% of the firm’s latest reported annual turnover figure”, or where the law firm or any “owner, manager or employee” had provided security.
Alongside the consultation, the SRA has published new guidance on litigation funding for law firms.
This explains how solicitors and law firms should assess whether funding arrangements are in the clients’ best interests, maintain their independence, manage conflicts of interests and ensure clients receive the information they need to make informed decisions.
Aileen Armstrong, executive director of strategy and policy, commented: “We have seen clear evidence that third-party litigation funding can create risks to firm stability and lead to poor outcomes for consumers.
“That’s why we are issuing new guidance for law firms and solicitors, and consulting on targeted new requirements to ensure third-party litigation funding is used responsibly and with safeguards in place.”
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