The Gazette’s recent report on Novitas loans in family/divorce matters has shone a light on compliance issues with litigation funding. There are significant risks and dangers which, if not considered carefully and mitigation steps taken, could potentially lead to disciplinary action against the firm.
So what are those regulatory risks?
1. Failing to act in the client’s best interests – This might be because there are other/better funding options available to the client (eg legal aid, legal services order, high street bank, family) which the firm hasn’t advised the client to consider or due to a conflict between the client’s best interests and those of the firm. Clients must be advised to take independent financial advice (on options available) and legal advice (on the terms of the loan).
2. Own interest conflict – who is the firm acting in the best interests of – their client or the firm? Clearly it will be in the interests of the law firm to have their costs paid for via the drawdown but is it in the client’s best interests? The risk of conflict needs to be considered and managed carefully. Making it a condition of accepting instructions that client will take out a litigation loan irrespective of their circumstances will not be in the client’s best interests.
3. Failing to act with independence – Any relationship between lender and firm must be disclosed. Also, is the advice during the case independent (and in client’s best interests) or is it being influenced by the funding arrangements in place? Opportunities to mediate , for example, may save the client significant costs. If the firm just views the funding as a “cash cow”, their advice on the benefits (or otherwise) of mediation/settlement might not be independent. An acceptance of the terms/process without any proper scrutiny/attempts to amend to reflect client’s best interests will not look good for the firm.
4. Client confidentiality – what information is the firm being asked to provide to the lender? Is it excessive? The lender will expect firms to keep them uptodate about prospects on the case. Does the firm have the client’s informed consent to do this? What does the agreement say about what the lender can/can’t do with the client’s information? Is that in the client’s best interests?
5. Acting with honesty and integrity – any dishonesty in updating the lender on developments /prospects/costs etc could result in complaints by the lender and/or the client. Dishonesty and integrity are of course viewed very seriously in disciplinary proceedings.
6. Breaches of the SRA Financial Services (Scope) Rules and (Conduct of Business) Rules if adequate advice (eg as to not having carried out a review of the market etc) has not been given.
7. A failure to properly advise on the likely costs of the cases. Assessment of costs needs to be realistic and proportionate (and advised to the client with regular updates). The client has a right to challenge the bills and must be told of that right.
8. Breaches of undertakings – agreements between the lender and firm as to how the scheme will operate will usually include undertakings on the part of the solicitor. Some of these might be onerous. Are you happy as a law firm to accept such undertakings and is the client aware of the obligations the firm is taking on? Irrevocable authorities from the client will usually have to be obtained (eg to pay settlement sums to the lender etc) and client will need independent legal advice on this too.
9. Failing to properly advise clients when acting as the independent legal advisor. Time needs to be spent with the client to ensure they understand the implications of the agreement they are signing. This must not be a five minute ’rubber stamping’ exercise.
The SRA will treat any breaches of these principles/standards seriously, particularly where vulnerable clients are involved, with the potential for significant consequences both in sanctions and reputational damage. Reviewing not only the terms of agreements and advice letters to clients and ensuring that there are processes put in place to mitigate these risks and auditing these processes regularly to remain compliant will be key.
Michelle Garlick is a regulatory partner with Weightmans LLP
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