The head of a litigation funder which precipitated the collapse of a claims firm over the summer has insisted the sector remains attractive to investors.
In June Fenchurch Legal called in administrators to handle the affairs of Liverpool firm McDermott Smith, which owed the funder £900,000. Last month, an update on the administration stated that no assets had been realised and that it was unclear what funds would be available to any party owed money.
McDermott Smith was the latest in a series of firms to go under with thousands of ongoing claims, following Pure Legal and SSB Group.
But Louisa Klouda, chief executive of Fenchurch Legal, said investors continue to see value and attractive returns from the sector. ‘It’s important to remember that it is inevitable in any sector that you will face defaults and non-performing firms,’ said Klouda. ‘What it does do, however, is highlight the importance of having strong security measures and thorough due diligence in place to ensure enforcement procedures and asset recoverability minimise any potential credit loss.’
Klouda said that funders must have processes in place not just for initial vetting but also to monitor continuously how firms are mitigating risks. Fenchurch has this year introduced external risk assessments, employed in-house legal auditors, and increased both its monitoring and auditing efforts.
The company will continue to lend directly to law firms. The loans issued will be secured against cases and other assets of the law firms, ensuring that capital is protected.
Klouda rejected the idea that the claims sector is in crisis but said that firms managing a high volume of claims need ‘stringent’ due diligence to ensure cases are viable.
‘Many law firms and claims companies often jump too quickly into emerging claim types without solid legal precedents to support them.’ She cited mis-sold car finance as an area receiving attention but where there are no concrete details on timescales or the value of claims.
‘Some firms are already claiming to have £100m worth of claims ready for funding, but from a funder’s perspective, it’s crucial to approach these situations with caution.'
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