Moribund legal lender Novitas Loans has set aside £5.3m in compensation to customers who took out loans to fund their litigation, it has emerged.

Newly published accounts for the subsidiary of merchant bank Close Brothers, for the year to 31 July 2022, explain that a review of historical divorce and probate loans concluded it was ‘appropriate to offer redress to certain customers’. Novitas had instructed a third party to review these cases, an exercise which found that £5.3m should be paid out to people during the year. This is a reduction compared to the year before, when similar exercise in 2020/21 resulted in Novitas setting aside £6.2m in redress to probate and divorce borrowers.

The lender worked with hundreds of law firms of all sizes and at one stage had committed more than £200m in litigation loans that were arranged through solicitors. But Novitas, which was acquired by Close Brothers in 2017, ceased all new lending to the sector in July 2021. The closure came amid complaints from clients about loans arranged with Novitas and the collapse of claims group Pure, which funded many of its cases through Novitas finance.

Overall, the Novitas accounts show that the business lost almost £30m in 2021/22. It posted a £41m deficit the previous year.

Director Matthew Roper said this year’s losses were ‘mainly driven by provision for impairment losses reflecting the latest assumptions on case failure and recovery rates, and by evaluating a range of possible outcomes and information available at the balance sheet date’.

The company reported that it had £31m tied into so-called ‘stage 1’ loans in July 2021, meaning they were expected to be repaid within three months. That figure had decreased to £9m a year later.

Meanwhile, loans at stage 2 (repaid within six months) went from being valued at £33m to £50m. The value of loans at stage 3, not likely to be repaid for at least six months, more than doubled to £54m.

Novitas managers have spent time in the past year ‘reviewing and enhancing their internal vulnerable customer processes and training’, the annual report discloses. This was focused on being better at identifying vulnerable customers and ensuring they receive the support they require.

The report added that Novitas had ‘worked to create a robust training plan to upskill all employees’.

The extent of the total losses that the loans company might eventually incur were disclosed earlier this month by Close Brothers in an announcement to the London Stock Exchange. Close said it was ‘reviewing its options with respect to certain cases being funded which now have limited prospects of successfully progressing through the courts’. This review is likely to mean the group has to write off £90m in the current financial year, and could result in an ‘aggregate impairment provision’ of up to £183m.

 

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