Unless you are new to dispute resolution, it is likely you’ll have a good understanding of litigation funding and After the Event (ATE) insurance. You probably have your fair share of “go-to” contacts that you call when the need arises. As familiar as you may be with certain products, how well do you know the obligations imposed on you in this area by the Solicitor’s Regulatory Authority (SRA) and are you confident that you are consistently meeting them?

What obligations?!

The SRA Handbook, most notably the SRA Code of Conduct, the SRA Financial Services (Scope) Rules and the SRA Financial Services (Conduct) Rules, sets out duties and guidelines that apply to solicitors when assisting their clients to obtain litigation funding and ATE insurance. The Handbook was updated last year to implement the EU Insurance Distribution Directive (EU) 2016/97, which provides further obligations for firms assisting clients with their ATE insurance arrangements. The penalties for non-compliance are severe and can include criminal sanctions. In addition, a breach can open the door to a potential professional negligence claim and lasting reputational damage.

“I’ll just avoid any involvement in insurance arrangements”

Whilst this might seem like the perfect solution, it’s practically impossible for today’s litigators. Clients are increasingly keen to manage their legal spend and law firms that only offer private fee-paying models are beginning to find it challenging to win new business over their more flexible competitors. Whilst your typical client base might require funding rather than insurance, a litigation funder will often insist the client obtains an ATE policy to protect them against an adverse costs order so the obligations will still apply. Moreover, it isn’t realistic to expect the client to seek litigation funding or ATE insurance without their lawyer’s assistance as most, if not all, providers will insist upon heavy involvement from the client’s solicitor when they are undertaking their due diligence and deciding whether to offer terms.

The Highlights

It is impossible to write a blog that replaces the need for you to read the SRA Handbook, but the following bullets highlight some important points.

1. You need to be registered with the Financial Conduct Authority (FCA)

The SRA Financial Services (Scope) Rules state that a law firm may only carry on insurance distribution activities as an ancillary insurance intermediary. To do so, your firm must be registered with the FCA as an “Exempt Professional Firm” and the SRA must have been notified of your registration. You must also appoint an Insurance Distribution Officer and notify the SRA of their details. This is so even if all you plan to do is assist the client to complete the application form for ATE insurance.

2. The broad principles contained in the SRA’s Code of Conduct

The SRA’s Code of Conduct states that a solicitor must put their client in an informed position to make decisions about how to manage their fees. Whilst many lawyers won’t have realized these duties extend to their advice (or lack of) relating to litigation funding and ATE insurance, others hope to rely on the fact that their engagement letter includes a mere reference to the existence of these products. All too often lawyers only engage in meaningful discussions about litigation funding and ATE insurance where there is a concern that the client can’t or won’t pay their fees. However, failing to explain to a client that they may be able to secure non-recourse funding for their claim or insurance that will reimburse them for a portion of fees in the event of a loss ultimately means the lawyer has failed to put the client in an informed position and has, therefore, not met their SRA obligations.  

3. It is important to provide the client with the right information, at the right time and in the right format

The SRA Financial Services (Scope) Rules list the information you must give to the client before providing a service which includes the carrying on of insurance distribution activities. The Rules also provide a template statement to be provided to the client. This information can be given on a stand-alone basis or can be built into other documentation such as your standard terms and conditions provided the information is given in a manner that is “clear, fair and not misleading”.

As with previous versions of the Rules, you must provide the client with objective and relevant information about, your services, the policy and how it meets their demands and needs in good time so that the client can make an informed decision.

If the client is an individual acting outside of their trade or profession, you must also ensure the insurer provides them with an Insurance Product Information Document (IPID) setting out the key information relating to the policy to enable them to make an informed decision about the specific insurance product.

Finally, it is important to keep records of your insurance distribution activities. Your normal file note will be sufficient provided it contains the name of the client, the terms and the date of the instruction.

4. The new Rules set out a higher level of accountability for firms making personal recommendations

Many clients will expect their lawyer to recommend the most appropriate insurance product to meet their needs and, historically, many lawyers have done this as a matter of course. Under the new Rules, you must disclose whether you are making a personal recommendation and, if so, whether it is based on a “fair and personal analysis”. You must also disclose whether your firm is under a contractual obligation to offer insurance policies underwritten by a specific provider or providers.

If you are making a personal recommendation based on a “fair and personal analysis” your analysis must have included “a sufficiently large number of insurance contracts available on the market”. Such a task can be time consuming but you or the client can instruct a regulated insurance intermediary to assist.

Where you provide a personal recommendation, you must also provide a personalized explanation as to why this contract of insurance best meets the client’s demands and needs.

5. You must account to the client for commissions or payments

You must be able to justify the choice of any funder or insurer you put forward based on your client’s needs over any potential benefit to you or your firm and you must account to the client for any pecuniary reward or other advantage received. Moreover, a firm must not be remunerated, or remunerate its employees, in a way that gives rise to an incentive to recommend one insurance policy over another if the other policy better meets the client’s demands and needs.

6. An investment in knowledge pays the best interest

The SRA stipulates that each relevant employee must possess the requisite knowledge and ability to be able to complete their tasks and perform their duties adequately. With the litigation funding and ATE insurance market developing so quickly, regular training sessions providing an updated overview on the market as a whole are vital. Often, these sessions focus heavily on litigation funding, however, your team’s knowledge of the insurance products available on the market and an understanding of the regulatory obligations you must meet when assisting your clients with such products is arguably far more important given the heavy penalties your firm may face for failure to comply. Obligations aside, you can use knowledge of these products to win new business and to increase profitability.

In conclusion

The updated SRA Handbook, incorporating the EU Insurance Distribution Directive (EU) 2016/97, amplifies the need for lawyers to take care when advising all clients of the litigation funding and ATE insurance options that may be available to them when bringing a claim. Heavier requirements apply to insurance contracts than litigation funding arrangements. However, this can make little difference in practice since litigation funders in actions in which costs follow the event will often insist the client obtains an ATE policy that protects them against the risk of having to pay an adverse costs order as a pre-requisite to the funding arrangement.

Ensuring you meet these updated obligations can be a daunting task. Whilst the SRA Handbook provides clear and helpful guidelines with regard to the information that must be provided to a client, it remains silent on how to identify appropriate providers and obtain commercial terms. You need not meet this challenge alone nor should obtaining help be expensive. Most brokers in this arena will provide their assistance in return for a contingent commission payable by the insurer or funder from their premium or success fee. This means that help can be obtained quickly and cheaply, leaving no reason for a lawyer to risk falling foul of the SRA duties and no need to expose your firm to professional negligence clams, reputation damage or the threat of criminal sanctions.


This article first appeared on the Practical Law Dispute Resolution blog. Please click here to be directed to the article on the PLC site.  

Verity Jackson-Grant


+44 (0) 203 965 5333

Email Verity here