What risks are you prepared to take?
Litigation funding and ATE insurance providers are pooling their resources in order to provide litigation ‘solutions’. This is leading to increased choice; but has made comparing them on a like-for-like basis more difficult in terms of the necessary due diligence required.
As a consequence, there are risks that potential clients make in choosing their legal advisor, and similarly risks that you take in how and what you advise them, given your compliance responsibilities and client care obligations.
ATE Insurance
These obligations include offering After-The-Event (ATE) insurance to mitigate the risks in litigation. Litigation backed by ATE insurance makes sense for many reasons – not least, peace of mind for your client. Offering litigation funding without an ATE insurance policy is simply a risk that needn’t be taken.
Once there were separate ATE insurance providers, litigation funders and costs consultants. Now there are combinations of these services merging and pooling their resources in order to provide litigation ‘solutions’. In addition some law firms are setting up their own litigation funding arms. This is leading to increased choice; however it has arguably led to difficulties in comparing the appropriate insurance and funding products on a like-for-like basis.
Litigation Funding – Disbursements and Own Fees
This is a rapidly growing – but currently unregulated – sector with great potential to help reduce a firm’s cashflow burdens and attract new business, especially for commercial disputes. With coverage of litigation funding gaining momentum in the legal press, the following guidance should help lawyers identify products that suit both their clients’ needs and also meet their law firm’s compliance and best practice obligations:
1. Make sure the funding provider you identify is both UK based and Financial Conduct Authority (FCA) regulated.
2. Fully explore your client’s means and explain clearly what the potential cost of the funding product is, before advising them on their funding options.
Due diligence on ATE insurance and Litigation Funding providers – the ‘key three’ questions to ask
You need to be sure, should something unexpected happen and you need to make a claim, that the policy and provider will respond, otherwise you risk potential damage to your firm’s hard won reputation. When doing your research there are, as a minimum, three criteria to bear in mind:
1. Is the insurer or funder UK based? Mainland European insurers are not subject to the same solvency and compliance requirements as UK rated insurers. The problem of using unrated insurance was highlighted recently with the collapse of Danish-based insurer Alpha; this left black cab drivers uninsured and therefore not able to operate.
2. Does the provider have ‘A rated’ capacity and are their available accounts in good order? ‘A rated’ means that the insurer is financially stable and has an excellent ability to pay out claims; ‘B’ and ‘C’ rated are much less so. The health of a company’s accounts is not the litmus test but is a very good indicator of resource issues or structural problems that may impact on the service provided.
3. Is the provider FCA regulated? The Financial Conduct Authority (FCA) regulates insurance intermediaries and lenders; ‘FCA authorised and regulated’ means that they are subject to the FCA’s Handbook of rules and guidance. The process of becoming regulated is comprehensive and thorough. Though it is a requirement for an insurance provider, it is not a current requirement for litigation funders.
Although it is preferable to not be in that situation in the first place, if a problem has occurred then the protection afforded by using an FCA regulated insurance and funding intermediary is highly desirable. ‘Fully authorised and regulated by the Financial Conduct Authority’ ensures that your firm and your client are working with a reputable business who adheres to all UK financial services legislation and regulations.
Ethics and Responsibility
A responsible and ethical approach to lending can be influential in a client’s perception when choosing a professional advisor. Aside from considering the above key topics for your due diligence, do also take into account whether a funding provider’s offering is consistent with your firm’s corporate values.
Their approach to responsible lending is a good ethical measure of how they manage their business and, importantly, how they would conduct their relationship with your client. You may also get a feel for this by looking at how they handle related subject matter, such as data security and management – a topic that is in sharper focus at present with the recent GDPR introduction.
Ultimately, the product and provider you offer should be aligned with the client’s needs, the potential costs of the funding product need to be fair, and details – such as the interest rate to be charged – should be transparent. It is especially pertinent for fee funding that the means of calculating interest does not generate excessive and/or disproportionate returns on the funding investment.
Whilst the litigation funding market is currently unregulated, in the longer term it could come under scrutiny from legislators and regulators. Following best practice from the outset will help you be confident in the decisions you make now about your ATE insurance and funding providers.
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