The Investment Culture of Litigation Funding

Litigation funding has increased in popularity in England in recent years as more law firms become familiar with the concept of this industry. Third party finding can be a risky business, as funding companies must enter into a case that is high risk but with the potential for high reward.

Cases that are approved by litigation funding companies must:

•       Have a high level of potential damages
•       It must be a strong case
•       The defendant must be able to pay

The fastest area of growth within the UK’s litigation funding industry is in hedge funds. This means that an increased number of litigation firms have taken on cases within this area of law in the last year.

However, some of these funding companies often do not accept cases with a value of less than £5m. The reason for this is that funders need to receive a high return for the risky position they have placed themselves in. A lot of funding companies require their original investment back at the end of a case, plus a Return on Investment (ROI) that amounts to three times the investment amount. Other companies request a percentage of the damages.

Other funding methods have existed in the past, and some of them have been available to solicitors. These methods may not be in existence today though, either because they have fallen out of favour or have been found to be too risky.

Here are a few examples:

Consumer Credit Agreement (CCA)

With a CCA a client borrowed money from a finance company. The loan term would usually last for around three years, although some would specify shorter terms. The amount loaned would be insured with an After the Event (ATE) policy, in case the client lost their case. Money could be drawn from the loan to pay for solicitors’ disbursements and they in turn would work with a Conditional Fee Arrangement (CFA). One of the drawbacks of CCAs was the high interest rates involved.

Direct lending

This method was available for solicitors. It was a way for law firms to take on the loan themselves rather than their clients applying for CCAs. The issue with this was that it could be very risky, so the benefit of having direct access to a loan wasn’t worth it in the end.

The future of third party funding

At present there is no real market for funding lower value claims, but there are some predictions for how these claims will be funded in the future. Alternative business structures (ABSs) have recently been introduced and could become the answer to this issue.

Litigation funding is steadily increasing within the UK, and its success overseas is also climbing, helping it to become a burgeoning market.