Posted by Chris Deadman, director of operations at Litigation Futures Associate Invicta Capital Funding
There have been a few threads on social media recently where claimant solicitors have complained that litigation finance is often too expensive for it to represent a viable funding option for their clients.
There is no doubt that, in the early years, litigation funding was aggressively priced. But as new players have entered the market with access to ever-increasing amounts of capital, the costs have reduced considerably. The days of every funder requiring a return based on a significant portion of the claimant’s damages are an almost-distant memory.
I cannot speak for other litigation funders but, in our sector of the market (small and medium-sized commercial litigation), the overwhelming majority of applicants are distressed purchasers, that is to say they are applying for our capital out of necessity rather than choice. We are certainly not operating some kind of payday loan enterprise here like the recently imprisoned Scott Tucker, but our money is priced in recognition of the fact that our closest competitor is the law firm itself rather than traditional lenders.
But to answer the question, ‘is litigation funding expensive?’, the answer must surely be ‘expensive compared to what?’ A credit card loan can be picked up these days for around 19% APR but, unlike litigation financiers, credit card companies have a vulgar habit of demanding that the borrower to repay the capital plus interest (I know, right?).
The same applies to secured loans which afford the borrower the luxury of paying back the principal over a long period of time if required. Unfortunately, these lenders disgracefully expect the monthly payments to be maintained and will recover the asset against which the loan is secured if the borrower defaults.
Litigation funders do neither. If the case loses, is abandoned or fails to recover damages, it is the funder and after-the-event insurer who absorb all of the financial pain. They are the only parties who suffer an actual loss of cash.
Even the lawyer is partially compensated as the only loss they incur is terms of their inability to collect the balance of their fees and uplift on their conditional fee agreement. The claimant walks away with no financial obligation to any party and the cost of which is factored into the return model.
Part of the problem is that many claimants and lawyers do not fully comprehend that there is often an internal cost attached to a funder’s money. Investors give funders access to their cash based on a predicted annual return. Given the possibility that the investor may lose all of their cash if cases do not succeed, they will be looking for a return that acknowledges this scenario and compensates them accordingly for this risk.
Another issue is the attitude that claimants sometimes adopt in respect of their litigation. I have yet to meet a claimant whose case isn’t the strongest I will ever encounter nor will fail to settle within a matter of months for precisely the amount of damages sought.
This is inevitable, as most SME claimants have a high degree of emotional capital invested in their claims. They have been wronged by another party and are therefore sometimes incapable of entertaining the possibility that they may not succeed.
Claimants often approach funders with the attitude that they are doing them a favour by giving them VIP access to an investment with a guaranteed return and with the expectation that the cost of funding to be priced accordingly.
Ask an experienced funder or ATE underwriter and they will tell you that the road to the workhouse is strewn with the carcasses of racing certainties.