FTSE-250 merchant bank enters legal loans market as options for firms multiply

Graves: defendant/insurer tactics have changed

Specialist legal loans business Novitas has been bought by FTSE-250 merchant banking group Close Brothers in the latest development in the increasingly active legal lending market.

The Salisbury-based firm specialises in providing working capital, disbursement and costs advance funding for law firms and also loans to their clients involved in litigation such as divorce, contested probate and clinical negligence.

It will become part of Close Brothers’ invoice finance and rentals division. The plc’s services to the legal market have focused until now on professional indemnity funding, VAT loans and practice loans.

Close Brothers described the deal as a “strategic acquisition”, as the group is “focused on building leading positions in the specialist markets in which it operates”.

In a statement, it said: “Both companies anticipate strong growth in the legal funding sector, where growing strains on cash flow are becoming an increasing impediment to accessing legal services.”

At July 2016, Close Brothers had a loan book of £6.4bn, the majority of which is loans to SMEs.

David Thomson, chief executive of the invoice finance and rentals division, said: “We are committed to growing our market-leading working capital funding proposition both organically and with selective and high-quality acquisitions. The acquisition of Novitas fits perfectly with this strategy.”

Jason Reeve, managing director of Novitas, added: “In Close Brothers we have found the right partner to support our firm and allow us to unlock our growth potential. The company’s experience and approach to doing business complements ours and I know our clients will benefit from the stable funding and lending expertise that Close Brothers brings.

“The time is right to increase our already strong loan book, and working with Close Brothers will help us with our ambitious growth plans”.

With the launch last year of SpectraLegal as well, more funding options are becoming available for law firms, especially in the personal injury market.

Earlier this year, Novitas collaborated with Pure Litigation Funding – part of the Pure Business Group – and after-the-event insurer Box Legal to launch Pure Funding, which provides off-balance sheet lending to firms for claims, with the potential damages being used as security for the loan.

Pure said that this departure from the traditional approach of seeking securities and debentures from the law firm “means that it is the firm’s potential earnings which limit the funding available to them to prosecute claims rather than their balance sheet, which may be subject to other lending restrictions from their banks”.

Pure Business Group CEO Phil Hodgkinson said: “While direct client funding is not unheard of in litigation it has, in the past, been restricted to high-value cases, with third-party funders taking large swathes of the damages in return for providing the funding.

“Pure Funding has approached this from a different angle securing a significant line of funding to be lent out at some of the lowest interest rates available in the market today, and by structuring the lending in such a way so that much of the interest charges are recoverable as part of the legal action.”

He said the product allowed for the clients of law firms to pay for disbursements as they were incurred, rather than on a deferred basis and at reduced cost as a result, it also meant they could instruct barristers on ordinary terms rather than under conditional fee agreements, thus avoiding success fees.

“The product is aimed at improving the efficiency and profitability of the whole sector by removing the hidden charges for deferring payment.

“Even where disbursement providers are prepared to defer payment until the end of case this still appears as a debt on the solicitor’s accounts and the deferment inevitably increases the unit cost of the disbursement.”

Another recent development was the launch of a high-cost case funding product for personal injury claims by VFS Legal Funding and Citadel Law, the specialist personal injury consulting law firm.

It is tailored to meet the cash flow requirements of personal injury law firms that self-fund high-value and high-cost cases where liability has been admitted but no or insufficient interim payments on account of costs and disbursements to fund the case.

It allows them to draw down a proportion of incurred work in progress, disbursements and counsel’s fees during the course of the matter.

Citadel’s role is to provide independent oversight and governance for the borrower firm by reviewing claims strategy as well as overseeing WIP and disbursement drawdown.

Citadel managing director Lesley Graves said: “Defendant/insurer tactics have changed and they know that they can put the squeeze on claimant law firms by drawing out the litigation process and refusing to make interim payments on account of costs.

“The CPR and case law is clear but many law firms get a knock back from insurers when an interim payment on account of costs is requested and I want to ensure that law firms have the cash flow to support their long-tail PI claims.

“An emerging body of case law is establishing clear principles regarding defendants’ liability for interest where litigation funding has been utilised; ultimately, if defendants want to avoid liability for interest, they should pay up to claimant law firms in the first place.”

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