Funder lent to both parties in former couple’s property battle

Ex-partners involved in a property dispute with each other were unknowingly being lent money by the same litigation funder, it has been revealed. The Financial Ombudsman Service (FOS) found that lender Novitas Loans – which had access to legally privileged information from both parties – created a situation where it had competing interests and could harm one side or the other.

In a decision notice the complaints handler said there was no evidence to show Novitas explicitly told the clients it was funding both sides of the litigation, and no sign that the company managed any conflicts of interest.

The client, identified as Mr A, had complained that Novitas negligently approved a litigation funding loan for his ex-partner and also lent him money without checking his ability to repay. 

Mr A had sought advice from an unnamed solicitor after his ex-partner threatened to bring a claim against him over their joint property. The solicitor, who was on Novitas’ panel, told him about an available facility and arranged the loan secured with a charge on Mr A’s property - the property at the heart of the dispute.

Novitas agreed that Mr A’s solicitor could draw down funds of up to £60,000 to cover legal costs as and when required. The full facility was exhausted within two and a half years and Novitas then agreed a £30,000 extension; the solicitor had initially wanted to extend the limit by £70,000. The annual interest rate on both loans was 18%.

The FOS stated that at the time of taking out the first loan, Mr A had annual earnings of around £10,000 and already owed £240,000.

Before any conclusion was reached on the proceedings between Mr A and his ex-partner, her solicitor’s firm was shut down by the Solicitors Regulation Authority. She obtained new lawyers and they settled the dispute amicably following a successful mediation.

Novitas, which left the legal market in 2021, accepted that it irresponsibly lent to Mr A and proposed to write off interest and fees worth £38,500, but the client took his complaint further, saying his solicitor was not acting in his interests which meant the loan agreements should be void.

Mr A submitted that Novitas should not have approved his loan or the £50,000 borrowed by his ex-partner. Novitas denied creating an inaccurate, unclear or misleading perception of the facility and said there was no detriment to either party from it lending to both of them.

The financial ombudsman found the pre-loan checks carried out by Novitas were neither reasonable nor proportionate. The company asked only whether he was a UK resident and checked for any county court judgments or insolvency proceedings recorded against him. The only other check was whether he owned a property that could be sold to repay the loan.

The ombudsman accepted that the ex-partner’s solicitor acted fraudulently (he has since been subject to criminal proceedings) which increased the litigation costs. Novitas was not found responsible for losses suffered as a result of this fraud.

But the funding of both parties’ litigation did create an additional conflict and risk to Mr A’s interests. It effectively controlled the ‘purse strings’ for both sides and could make additional funds available for one party or the other, the FOS reported. 

‘Novitas provided Mr A with a loan that was secured on his property and this is different from a personal loan,’ added the ombudsman. ‘More importantly, a key feature of this lending arrangement was that Novitas was in a unique position where both solicitors of Mr A and [his ex-partner] were members of its panel under a pre-existing business arrangement. This meant Novitas was the creditor in debtor-creditor-supplier agreements with both.

‘Novitas agreeing to fund both sides of the litigation created a situation where Novitas had two or more competing interests and there was at least the potential that serving one of those interests could damage or harm the other interest.’

There was no evidence that Novitas took any internal steps to guard against a conflict - not even assigning separate case officers to each party. The ombudsman concluded the arrangements were unfair to Mr A, particularly because he did not know Novitas was already funding his ex-partner, which created a ‘significant inequality of knowledge and understanding’.

The ombudsman ruled that Novitas should refund all interest and charges and reduce the capital sum by half to cap Mr A’s total liability to around £36,000.

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