Law firms risk breaking conduct rules if clients are not fully informed of their rights before taking out loans to finance litigation, the Solicitors Regulation Authority warned this week. The development comes after the Gazette revealed that more than a dozen clients had alleged that they had been pressured into borrowing to fund their divorce cases.

It emerged this week that the lender, Novitas Loans, was regulated by the Financial Conduct Authority only from September 2016. The Gazette has also been made aware that Novitas, a subsidiary of merchant banking group Close Brothers since 2017, has contacted former clients offering to refund their interest and reduce their outstanding debts. A spokesperson for Novitas declined to comment.

The SRA continues to investigate complaints relating to firms that arranged loans and said this week that solicitors should make themselves aware of the rules surrounding litigation funding. Firms are only allowed to make clients aware of the option for external finance and, if they recommend providers, must also recommend taking independent financial advice.

The SRA’s code of conduct states that clients should know about any links between lender and law firm, and firms are bound by rules preventing them abusing their position and requiring them to take account of clients’ needs and circumstances.

An SRA spokesperson said: ‘Third-party funding has a legitimate place in legal services and has a role to play in improving access to justice, including through legal aid. However, borrowing against a legal outcome will always carry risk and solicitors have a duty to make sure their clients are fully aware of this risk and have sought independent advice in circumstances of conflict.’

Litigation funders do not have to be regulated. It is unclear what protection Novitas customers had before 2016, but the company was incorporated in 2011 and appears to have been active in the intervening five years. Accounts for the year ended 31 March 2015 show Novitas was owed £26.5m.

An FCA spokesperson declined to comment on individual firms, but said: ‘We will not hesitate to act should the activities of a regulated firm fall below the standards we expect.’