The owner of failed legal sector lender Novitas is preparing to write off £90m after admitting that its book of cases is unlikely to come to anything.

In an update to the London Stock Exchange, merchant banking group Close Brothers Group plc, which bought Novitas Loans in 2017, said a review of cases had found some which now have ‘limited prospects of successfully progressing through the courts’.

Close Brothers has therefore recognised additional provision of up to £90m in its results for the first half of 2022/23. The company has forecast that net income related to Novitas will fall from £36m last year to £8m in 2024.

It has also emerged that Close Brothers has initiated formal legal action against an after-the-event insurer regarding the potential recoverability of funds from failed cases. Further action is being considered against other insurers.

The update on Friday added: ‘The group remains focused on maximising the recovery of remaining loan balances, either through successful outcome of cases or recourse to the customers’ ATE insurers, whilst complying with its regulatory obligations and always focusing on ensuring good customer outcomes.’

Shares in Close Brothers fell by 13% following the announcement, despite assurances that the overall performance last year had been ‘resilient’. The half-year results will be published on 14 March.

Following a strategic review, the group decided in July 2021 to permanently stop lending to new customers products previously offered by Novitas, and to withdraw completely from the legal services financing market.

Novitas worked with dozens of law firms but in particular provided revolving credit facilities for the claims business Pure Business Group, which went into administration in October 2021. It later emerged that Novitas, which was owed around £1.85m by Pure, had brought on the administration after a High Court petition following missed payments.

The Gazette has also reported that Novitas has come under scrutiny by the Financial Ombudsman (FOS) over its arrangements with solicitors to lend to divorcing clients. These relate to loans arranged before the acquisition by Close Brothers. Several clients have come forward to say they were not fully aware of what they were signing up to and felt pressured by their solicitors to take out high-interest loans.

In the most recent case, reported last month, the FOS found that Novitas acted unfairly in failing to carry out checks on a borrower’s income before lending her £232,000 to pay divorce costs. Novitas had to repay all interest and charges in that case and is understood to have waived interest repayments for a number of other clients.

 

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