Nick Shapland explains a new approach to funding disbursements
There is a form of litigation funding that goes largely unrecognised – the funding of client’s third party disbursements provided by law firms in the Personal Injury/Clinical Negligence sector. Tens of millions of pounds of support is given to clients by these firms at no cost to the client. The origins of this type of funding lie in the Access to Justice Act 1999 which created CFA ‘S to deal with the issue of legal fees in the absence of legal aid, but left claimants, with limited financial resources, unable to obtain medical reports etc to support their claim. Solicitors stepped into the breach to meet this very real need, albeit to some extent for their own benefit, and paid for the external expert advice needed to maximise the chances of winning the case. As a result, today law firms have significant amounts of their firms’ funds, or worse still borrowed funds, tied up in paying for disbursements. Many solicitors see the cost of providing client funding as an inevitable overhead of doing their business, but surely all businesses need to review their overheads from time to time in the face of changing circumstances.
Since 1999 much has changed and the cumulative effect of these changes has put pressure on the finances of law firms to the point that many senior partners and finance directors are asking whether it is wise to continue to allocate scarce financial resources to the payment of client’s disbursements. The introduction of fixed fees for certain types of claims and the prospect of the extension of fixed fees to Clinical Negligence has reduced the capacity of firms to generate cash. This combined with the rising costs of third party experts and the arrival of the £10,000 court fee has resulted in a real squeeze on cash flow for many firms. One senior partner recently bemoaned having to write five £10,000 cheques for court fees so far this week and today was only Wednesday! To square the cash flow circle many firms use their excellent credit rating to borrow money from banks and other specialist lenders in their own name to meet the ever increasing demand to pay for clients’ external costs. Whilst the extent of such borrowing is a good measure of the pressures on cash flow in the sector, it does not represent a long term solution; it is merely a sticking plaster that hides the symptoms of the dilemma facing many firms.
An alternative is being offered by a small but growing number of specialist lenders who seek to provide the long term solution – they lend, under a CCA agreement, the money required to fund disbursements directly to the claimant. Under these schemes, law firms no longer have to carry the burden of financing their clients’ costs. However it is clear that for claimants to even consider taking such a loan, the agreement must mirror the nature of a CFA, that is if the case is lost the claimant/borrower does not have to repay the capital and interest. To do otherwise would be unacceptable both ethically and commercially. Many PI clients struggle with financial pressures due to the inability to work on a full or part time basis. To compound these pressures by demanding repayment in the event the case is lost and funds are not available is unacceptable. These loan providers use the “security” of an ATE policy to manage an element of their risk in lost cases and this reduces the cost of such lending significantly.
To offer a credible alternative and relieve the burden on solicitors of funding third party costs, these disbursement funders must not only provide appropriate products to meet the legitimate needs of anxious claimants they must also consider the regulatory, marketing, financial and ethical issues from the law firms point of view.
For once the regulatory considerations for the law firm considering introducing such a product to their clients are relatively simple. Solicitors are exempt from the need to obtain FCA authorisation under their SRA supervisory regime. From a marketing and client relationship perspective law firms have offered a package of CFA and disbursement funding that no client could refuse as it requires no initial financial contribution whatsoever from the claimant. The need for clients to take responsibility for funding their third party costs and the nature of any disbursement loan must of course be communicated clearly, openly and honestly to clients. For example, the possibility that the client may be able to reclaim some or all of the interest on their loan from the defendant is a complex one that requires a further article in Litigation Funding in its own right.
Practice managers are increasingly concerned about the financial aspects of funding client disbursements out of their firm’s own resources. They are asking whether their firms should consider third party disbursement funding for their clients, as the sums of money involved are large and growing and there is a price to be paid. If a firm chooses to finance client costs itself the impact is not on the profit and loss account as the interest cost to a firm of providing such support is low. The real impact, however, will be on the firm’s gearing levels and more importantly on the opportunity cost to the business of having scarce recourses tied up in non earning “assets”. If these significant sums were released to invest in training, recruitment, expansion or acquisition for example, would the firm better able to service its clients’ best interests as well as its own?.
Is it ethically correct for a law firm to require that a client pays for their third party expenses knowing that in the majority of cases the client will need to borrow the money and pay an interest cost that may not be wholly reimbursable from the defendant? Of course each firm must consider what is in the best interests of their clients, but the question is not a simple one. It is not in the interests of a client for their legal adviser to be under cash flow pressure from the ever rising need to finance disbursements, particularly if this could lead ultimately to the failure of the firm. Surely it is also in the client’s best interest that available funds are directed at improving the quality of service and advice by investing in training, research, recruitment and retention of the best people.
Over the last year increasing numbers of law firms in the PI sector have considered these issues and have concluded that for them they cannot continue to be one of the unrecognised and inadequately rewarded providers of disbursement litigation funding to their clients. Will this response to the very real and increasing financial pressures in this sector become the new normality?