While applying for litigation funding you might often hear people mentioning different names, like: “claimant (client) funding”, or “practice funding”. What is the difference between these two types of funding? Is there anything more you should know about claimant funding?
Practice funding is a type of direct lending. In other words, it is a loan to a law firm. It is then in the firm’s discretion how the money is used and divided. Money providers often limit the types of these transactions to restrict firm’s freedom in disposing the money. It is a way to secure a proper way of money flowing and not to abuse the whole funding process. Without these restraints law firms will spend the money not only on different kind of cases but on any other non-essential product or services.
The big advantage of the practice funding is the lower cost of lending as the risk is assessed on the portfolio of cases rather than one standing case. Moreover, the deployment of funds is much faster and more flexible in this option. Lastly, the cost of funding is paid by the law firm. This can be used in situations where cases are not funded because the damages are too low and disbursements are higher, which makes a case non-economically viable for funders.
On the other hand, there are also some disadvantages of the practice funding. Such funding is a loan, therefore, it appears on a balance sheet as a liability. Having a debt limits law firm’s credit worthiness, thus, restricts its borrowing capacity. In the end, it makes easier receiving the money from the lender, but at the same time, it is more complicated for the firm to charge the costs of any such facility to the client. If the case is funded, how are you going to charge a client? That is a question law firm needs to address before applying for the practice funding.
Opposite to practice funding there is a claimant funding, called sometimes client funding, which consists of two different types.
First one is lending under the Consumer Credit Act (CCA). This law protects consumers and sets out how certain credit commercial agreements should be conducted. The CCA does not cover some types of lending and debt, such as mortgages or charge cards, but involves complex credit agreements and liabilities in all circumstances. This was the primary business of Affiniti Finance (more on this company below).
What Sentry does is the second type of funding: non-recourse lending. The most important aspect of this option is that it is not a loan. There is a funding agreement with the client but no credit agreement. Funder shares the risk and the upside when a case is successful.
The genuine claimant funding is non-recourse, unlike CCA, and does not entail any costs on the claimants’ side. The funding agreement clearly depicts in detail the potential costs at the outset of the claim. Claimant funding also allows law firms to keep it off the balance sheet and assess the cases purely on the merits of the claims with no external factors influencing the funding. This might be a more expensive option for clients, however, at the end, claimants will not endure any expenditure comparing to a typical loan.
Just few weeks ago, one of the biggest legal funders in the UK, Affiniti Finance Limited, went into administration. This legal process under the Insolvency Act aims at rescuing a viable business that is insolvent due to cashflow problems.
The Financial Conduct Authority register confirmed that Affiniti Finance is in administration and stopped taking on new business. It is unclear what will happen to Affiniti’s multi-million pound funding agreements with various law firms.
Affiniti Finance has described itself as the leading consumer credit litigation funder in the UK. It was founded in 2014, initially dealing with personal injury loans but later expanding its portfolio to include financial mis-sell and a wider range of consumer disputes. The commercial division of Affiniti Finance also specialises in funding options for high-value individual claims and group actions.
It is worth pointing out that Sentry’s business is much different than the Affiniti’s. Sentry’s mission is to support claimants gain access to justice. Sentry is helping everyday people and small businesses access funding whilst making solicitors lives easier through a transparent non-recourse funding process. Our revolutionary Fast Track funding product is speeding up the process and saving claimants money.
December 9, 2021
Insights
