Bradley: Consumers being harmed
The Solicitors Regulation Authority (SRA) has uncovered a significant amount of poor practice in the way law firms are managing high-volume consumer claims.
Concerns include litigation funding, referral arrangements, and poor client-care and costs information for clients.
As a result, the regulator is taking the “exceptional” step of requiring all firms active in this area to complete a mandatory declaration confirming they are compliant with the relevant rules and obligations.
Volume claims have shot up the SRA’s agenda in recent times, particularly in light of the collapse of SSB Law.
As of 31 July, it had 95 open investigations relating to 76 firms. Nine of them came out the thematic review of 25 law firms [1] in the sector that the SRA has published today, highlighting good and bad practice.
This in turn followed an initial survey of 129 law firms active in the high-volume claims market, who were together handling more than 2.4m claims.
The review prioritised firms which received litigation funding and had referral arrangements in place for consumer claims work. Both the head of department and a fee-earner were interviewed, and two files reviewed, along with the firm’s policies and procedures, and the learning and development records of those spoken to.
While some firms “demonstrated effective compliance” with the SRA’s Standards and Regulations across all of their volume consumer claims practice, “at other firms we found significant variation in awareness of, and compliance with”, the rules.
Areas of concern were:
- A failure to fully consider clients’ best interests when entering and managing litigation funding agreements and referral arrangements;
- A lack of due diligence when entering into new litigation funding and referral arrangements
- Weak systems and controls to monitor the ongoing compliance of referrers with the Standards and Regulations;
- Poor awareness of and compliance with regulatory obligations when arranging after-the-event (ATE) insurance for clients;
- Inadequate client onboarding processes, including checks on client ID, sanctions and conflicts of interest;
- Failure to give clients the best possible information about the costs of their matter, how it would be funded, and the options available to them;
- Inadequate advice to clients about their claim’s merits and prospects of success; and
- Poor awareness and understanding of SRA guidance relevant to volume consumer claims and continuing competence obligations.
Of the 129 firms, 30 used litigation funding. Between them, they had taken on a total of around £200m, nearly half of which (£93m) was working capital.
The rest was made up of £57m for financial services claims, £32m for diesel emission claims, £13m for housing disrepair claims, £7m for other claims types and £600,000 for data breach claims.
The £200m figure may seem low given that SSB Law went into administration owing funders that much by itself.
The 30 firms had arrangements with approximately 42 different funders, only seven of which were members of the Association of Litigation Funders – although they accounted for around £60m of the money.
The review found that, although most firms checked funders’ Companies House records, only a minority carried out other due diligence checks.
The SRA was concerned that few completed anti-money laundering and sanctions checks, “and that some firms did not know where their funders sourced the funds they were lending to the firm”.
Eighteen of the firms visited were using litigation funding and for 10 of them it was secured by a charge over the firm, two by a charge over client files, one had a bespoke security arrangement and the other five provided no security.
“Our review highlighted that some firms have taken on very high levels of litigation funding as compared to their annual turnover… Some firms we visited suggested that funders could be persistent in offering funding or additional funding, with one firm describing a funder’s approach as aggressive.”
The SRA said it was also “worried” by how few firms explained to clients how the terms of their litigation funding agreement impacted the level of damages they would receive, the client’s obligations, and risks of the claim, such as withdrawal of funding in certain circumstances.
Some 110 of the original 129 firms had at least one referral arrangement – between them, there were 500 arrangements, and the number was particularly high in housing disrepair.
A minority of the 25 firms in the thematic review were able to explain all the relevant regulatory obligations and again there was evidence of insufficient due diligence, including many not checking referrers’ authorisation with the Financial Conduct Authority where needed, or Information Commissioner’s Office registration checks, “despite the large amounts of data processing likely to be involved in any referral arrangement”.
Two of the firms were reliant on the referrer for nearly all their work and the SRA is now investigating them given the risk to their independence.
None of the firms arranging ATE insurance received any form of commission, but few gave clients all of the information they had to about the policy.
When it came to onboarding, of the 50 files reviewed, client ID checks were not done on 11, conflict of interest checks not done on 28, and sanctions checks not done on 39.
“We were concerned by the lack of checks that firms were carrying out on clients, and that heads of department seemed to believe checks were being completed that were not,” the SRA said.
Two firms that did not verify information given by referrers are now the subject to investigation, as is one that did not obtain clear written authority from clients allowing the firm to act.
The majority of files did not have all the client-care and costs information that the SRA would expect to see, while only 12 of the 30 files where the client was referred by a third party disclosed there was a financial arrangement; on two files, clients were falsely told that there was no financial arrangement. This too has sparked investigations.
Law firms are obliged to tell clients about the availability of alternative, free routes to claim, such as through an ombudsman, but this only happened in 12 of the 33 files where there was an available scheme.
Firms gave clients substantive advice on the merits of their claim at the outset on 68% of the files, while not all clients were not informed of settlement offers.
Indeed, on five files, there was no evidence of the client consenting to a settlement before the firms told the defendant it was accepted.
SRA chair Anna Bradley said: “High-volume consumer claims can provide access to justice for many when done well. However, there are widespread issues in the market, and this is harming consumers.
“We are writing to firms requiring them to declare they understand our rules and are complying with them. Where we see poor practice, we will take robust action.”
The regulator has also commissioned research looking at consumers’ experiences when engaging with law firms to make a claim.
Aileen Armstrong, the SRA’s executive director of strategy, innovation and external affairs, will be speaking on these issues at our Claims Futures conference [2] on 22 October in Manchester. Early bird tickets are still available.