Is it wrong to profit from divorce litigation?
There are some intriguing developments in the financing of divorce cases at the moment.
Investment in divorce litigation hit the headlines earlier in the year with the high-profile divorce of Michelle Young from her millionaire former husband Scot, described in the press as a 'fixer’ for Russian oligarchs and British billionaires. There was considerable press attention in the fact that Young’s legal action against her husband has been financed by a litigation funder, prompting numerous articles about the trend of investors seeking to 'cash in' on divorce cases.
Young’s case was backed by Harbour Litigation Funding until 2009, and is now being supported by another, unnamed, funder. Harbour’s Susan Dunn tells me emphatically that her organisation will not be backing any more divorce cases - ever - and will stick to commercial litigation, which is its area of expertise.
It is very hard to tell how much money is actually being invested in divorce cases, or indeed who precisely is investing in it. But the perception that it is an expanding practice does seem to have contributed to calls for litigation funding to be regulated by government.
The Liberal Democrat peer Lord Thomas, who recently tried and failed to bring in government regulation of litigation funding, did so because he was concerned that it was spreading into areas where it would be individuals, not corporate entities, who would be on the receiving end of the funder’s cash, and these individual litigants would be in need of more protection.
Thomas referred to the growth of funding in divorce litigation and the prospect of it spreading into personal injury as a reason for bringing in government regulation. For the vast majority of funders, who deal only with commercial clients, investment in divorce litigation is therefore seen as a bad thing, as it could ultimately bring statutory regulation down onto the entire litigation funding sector. Most funders assert that they would not touch this sector themselves, as divorce cases are not governed by 'economically rational behaviour’ (as anyone who has gone through an acrimonious divorce will know).
But alongside investment in divorce litigation, the extent of which is unknown, what is more clear is that there is a real growth in lending targeted specifically at divorce claimants, with a number of players in this market. The latest development is the launch last week of a new fund by Novitas, which lends money to finance divorce cases.
Novitas has previously focused on high-value divorce cases, with an average loan value of £50,000, but interestingly it is now making a big push into the lower end of the market, offering loans from £3,000. Under its model, the client - usually the wife - takes out a loan using the matrimonial home as security, and her lawyer then bills against this loan.
Whereas previously Novitas’ referrals came largely from top-end private client firms such as Withers, as it expands to the high street, it now also has links with three QualitySolicitors firms.
Intriguingly, the company is hoping that well-heeled divorce solicitors will choose to put their own cash into its new fund as an investment opportunity. But one does wonder whether any potential difficulties could arise where a lawyer guides their client towards a loan facility in which they hold a personal stake.
At first glance, there may seem something slightly unsavoury about lenders seeking to turn a profit from divorce litigation. But ultimately, this new drive into the middle England market could have a beneficial effect on access to justice for spouses - mostly women - who are not being offered a fair deal in their divorce, but do not have the means to do anything about it.
And as the Co-op aggressively seeks market share in high street family work, anything that increases the overall number of divorce cases that can be brought could prove good news for solicitors as well as unfairly treated spouses.
Rachel Rothwell is editor of Litigation Funding magazine, providing in-depth coverage on costs and the financing of litigation.
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Comments
Divorce litigation funding
I was very interested to read this article. I have no particular relevant experience but perhaps Rachel Rothwell or someone else might help me with the following:
1) it is suggested that "the client - usually the wife - takes out a loan using the matrimonial home as security" but aren't there difficulties where the home is in joint names, which is how matrimonial property is commonly held?
and
2) Presumably the agreements will be regulated by the Consumer Credit Act 1974 with the potential for the Court to make orders if the relationship between lender and borrower is unfair?
and
3) If (2) is correct, I believe that this aspect of consumer credit law is widely regarded as weighted in favour of borrowers, so what would further regulation add?
What's wrong with profit?
Sorry – I don't really get it. Why is there at first glance, something slightly unsavoury about lenders seeking to turn a profit from divorce litigation? Solicitors do.
Divorce is always sad – but surely no one would think there something unsavoury about estate agents making a profit when a divorcing couple have to sell for matrimonial home, or buy a new property?
As unpopular as banks are now, they are businesses like any other. Unless you're suggesting that lending should only take place through “not for profit” organisations, or worse still, the government, there is no option but for any business seeking to lend money to seek a profit. In our broadly capitalist society, what's wrong with that?
Interest in interest
Any idea what the rates of interest are on these loans?
Novitas loans
Novitas has a website with a FAQ section which tells about loan cost, security and regulation
http://www.novitasloans.co.uk/index.html
Interest on divorce loans
It looks like the rate of interest is individually arranged but will typically be more than a bank loan, and less than a credit card (though it would be pretty shocking if it were more than a credit card!).
Simon Pottinger of RJS consultants gives some interesting thoughts on the issue of financing divorce litigation here: http://bit.ly/K818My.
One aspect to consider is whether, as the Co-Op moves into divorce litigation, it may begin offering tailored loan products to finance the litigation. Given that it would be getting the benefit of conducting the divorce work, it might make business sense to offer the loans at affordable rates to enable the case to be brought.
Interest
The following is cut and pasted from the FAQs on the website:
How much does the loan cost?
There are no costs or obligations until the loan contract is signed. When a client takes out the loan there are two charges (all of which are rolled-up so it is cash-zero to the client):
Set-up fee - a fee of £300 is charged at the start, rolled-up as part of the loan. If there are any further stages, such as FDA and FDR, £100 is added to the loan to cover administration. If the case goes to trial, a further £200 will be added.
Interest Payment - a fixed IR of 1.6% per month, or 19.2% APR. This is rolled-up as part of the loan on a simple interest calculation.
We ask the client to take independent legal advice on the loan, a firm may charge for this, but it can also be added to the loan.
How is the interest calculated?
Interest is calculated on a simple basis, i.e. there is no compounding of interest. We just take the annual interest rate, multiple by the loan amount and divide by the number of days that the loans has been outstanding for.
Does the client pay interest as they go along?
No; all the interest is rolled-up so there is nothing to pay until the loan is settled. Because we do not compound there is no cost penalty for waiting until settlement.
Divorce loans
Regarding Rachel's comment about the Co-op, I would have thought that there would be conflict issues and the potential for unfair relationship challenges under the Consumer Credit Act but I am certainly no expert.
Risk
I thought I would share some observations from the Novitas side.
When we set-up Novitas, it was to fill a gap where people just could not get access to funding. Banks won't lend without asset management (this is where they really make their money, and on average look for £3m plus to manage. Not a 'typical client'!) and often one party has no income so does not even qualify for a personal loan, regardless of whether their name is on the property.
We have seen dozens of cases already where the side with the money is dragging out the case, using the lack of funds of their spouse as a tactic to enforce an unfair settlement. This can never be right so access to litigation lending is a crucial element of making the system work equitably.
Also of note, is that we take all the financial risk on the loans; if you don't have profit to fund the loans that go wrong, your business ceases to exisit and the source of lending disappears. We also roll-up all the interest on a simple basis so we wait to realise our profit until the case is settled and the client is in a postion to repay. This is helpful for the client but also tough for a lender to wait that long when setting-up a business. We did it however as this is what the clients and the solicitors wanted.
Last point of note is that solicitors were frustrated by lenders coming in and then leaving the market. We therefore made a decision to use private money. This has a cost as investors want a return (hence paying 8% to investors in the fund). The upside is immediate lending decisions (no credit committees), no sudden policy changes, an interest rate that we can fix for the whole loan and long-term position in the market.There is always a trade to be made.
Looking forward, there are further areas that also need help. These include cases where one party has nothing in their name so cannot offer security, TOLATA cases, Schedule one. There are plenty of areas, even bigger than financial proceedings, that need funding help. We are working on solutions for these areas as well to offer as broad a service as possible. But yes, we will need to make a profit.
Who takes all the risk? The
Who takes all the risk? The above post from someone on the Novitas side states "Also of note, is that we take all the financial risk on the loans; if you don't have profit to fund the loans that go wrong, your business ceases to exisit and the source of lending disappears.
This seems to be saying that if a client 'loses' their case, which in family finance work generally means that they didn't get what they hoped to achieve and not enough to repay the loan, the solicitors would have to sustain the loss and repay the loan from their 'profit', but if they run out of profit they go bust, so Novitas lose out too, thereby taking all the risk, according to them! The solicitor appears to have taken the most risk, as Novitas only lose out if the solicitors go bust. If my understanding of the comment is not correct, please do clarify matters. However, my firm looked at this sort of funding a while ago for 'typical' family clients and felt uneasy with it. What about those cases where the client discontinues before settlement / the parties reconcile / the borrower gets no cash assets and just remains in the family home? Would Novitas take an interest accruing charge in the latter case? What if the house remained in joint names under a deferred trust? You'd need the consent of the co-owner for the charge. In the former instances, if the client has no cash to repay the loan and defaults on installments, what happens?
We decided to just enter into our own agreement with the client directly to defer costs to the end of the case, in the few cases that we felt it was appropriate. In theory I'd like to offer the loan option to clients but Novitas etc would need to persuade me of the benefits as against the risks and satisfactorily demomstrate how risk is mitigated. When we looked at it before, we just seemed to get gushing endorsements of what an amazing solution the loan arrangement was and felt like the lender just wnated us to rush into it, whilst glossing over the risks.
Risk to Solicitor
Dear anon,
To be clear, Novitas take ALL the financial risk, there is no financial undertaking from the solicitor which is what makes our scheme unique and why in our first year over 150 of the leading firms now use it.
If a loan goes bad, we have to recover from the client, NOT the solicitor. Consequenty we look very carefuly at risks, including all the ones that you list above (plus others).
Jason.
Litigation Funding and 'SPOUSES' treated unfairly
Dear Rachel,
I came across this article after recently receiving a judgement which was not in my favour.
I am however, a little disappointed about what you say with regards to Spouses being treated unfairly, not in those exact words, I might point out.
I have struggled to find legal help. I lost a well paid job a few years and despite not being in a position to pay my mortgage through my low-paid job, I sold many assets to keep a roof over my head and my girlfriend's head (no, EX) at that time.
I asked several times for my ex to move so I could sell the property and explained I was running out of money and I could not support her.
In brief, her contribution of £328 per month over 4 years, as opposed to my £1400 to £1600 per month (we shared the bills and food on top of that), and her deposit of £1100 as opposed to my £28k (ish) meant that depsite we weren't married, had no children, no contract, I already owned two other properties before we met, and I borrowed £12k from another property of mine, the Judge still awarded my EX, ALL OF THE MONEY from the property sale, including half the arrears which were £24k and that was split so, my EX ended up with everything and I am to foot her legal bill of around £20k.
So, spouses may be hard done by, which I can almost agree to that at some point but this a whole other topic - expecially when they are home, kids at school, plenty of time to study etc etc etc.
I'd be delighted to have a chat with you about my case. And to add to that, all the deeds were in my name, my name on the land registry, my name on the mortgage, the second loan, I attended all the financial meetings to fund the sale, on my own, I arranged the viewings with both builders and even agreed a private deal with the vendor before my ex, who by her volition, made an arrangement to view the property with the selling agent...
May I also point you to a recent case, married, children, man left, fought for 50%, court of appeal and woman had payment for man reduced to 10%, thus retaining 90% of the property value.
Kids and marriage were a clear factor in the decision but my case was completey different.
Your views would be appreciated...
JC