Increasingly competitive use of alternative fee arrangements will be one of this year’s challenges, Matthew Amey predicts

As awareness of the Third Party Funding (TPF) market continues to increase amongst lawyers and their clients (in particular amongst corporate clients), we predict continued growth, both in the number of completed funding deals and the amount of capital available. However, it’s the commercial ATE insurance industry that will really begin to understand the hand it has been dealt, following the enactment of the LASPO Act 2012.

Following March 2013’s unprecedented surge in demand for commercial ATE before the rules changed, there was an immediate (and inevitable) drop in demand for non-recoverable ATE products. In recent months, though, there has been a slow recovery. This appears to be sustained and is set to continue and accelerate in 2014.

Uncertain climate

In the uncertain climate which followed LASPO, insurers have generally taken a more conservative approach to pricing. In large, complex cases, some insurers are increasingly seeking partially upfront premiums; others have marginally increased their deferred premium pricing. However, once the ATE market stabilises and insurers have a better feel for the likely volume of applications and conversion of quotes under the new regime, we foresee some downward movement in average premium rates charged, albeit any major adjustments are unlikely to happen until 2015/16 when cases insured post-April 2013 start to conclude.

In lower value cases we expect to see:

• clients buying partial adverse costs cover or buying cover in stages

• clients opting to take an excess (very rarely used pre-April ’13)

• an increase in damages-based premiums (where the premium payable is calculated as a percentage of damages recovered)

• clients paying deposit premiums (i.e. part deferred, part upfront premiums)

All of these things are utilised to keep the premium price down and reduce the impact of the non-recoverable premiums on the client’s damages.

The DBA regulations

If the DBA regulations are amended in 2014 to allow unequivocally for partial DBAs (as well as clarify several other issues), interest in all forms of funding will increase. When TPF started in earnest between 2008-2010 there was a distinct increase in demand for commercial ATE insurance even in matters where TPF was not discussed at all. Once clients start to consider risk sharing through alternative fee arrangements, like DBAs, the door opens to several other forms of risk sharing like ATE and TPF.

Whether via DBAs or not, an increased willingness of lawyers to risk-share, and increasing demand from clients for alternative fee arrangements will continue in 2014. Since the economic downturn, the legal industry has had to innovate. Increasingly we see examples of law firms offering creative billing options to compete for business. Outside capital and risk transfer are still under-used tools for unlocking new instructions.

Challenges for 2014: lawyers

Lawyers: Funding smaller commercial cases in 2014 continues to pose a major challenge. The abolition of recoverable CFA Success Fees and ATE premiums in 2013 means lawyers acting on smaller cases are having to navigate the difficult territory of factoring in a success-based return for taking the risk of not being paid in the future, against the backdrop of what is likely to be a limited recovery pot.

The hourly rate is far from a thing of the past for very large cases. Law firms will need to secure significant interim fee income to make the numbers work. However in 2014 we predict the increasingly competitive use of alternative fee arrangements, such as fixed fees, fee caps and deferred fees (sometimes covered by own side’s cost insurance) in smaller cases.

Another significant challenge for lawyers will be to keep on top of the myriad of funding options that may apply to a case so that they stay ahead of the competition and in some instances, simply avoid criticism for not presenting the best options.

Funders and Insurers:

The challenge here is not really to make low value cases work, despite demand for that to happen. There is already innovation in terms of aggregating claims and financing law firms, however the economic challenges of funding cases where the costs involved can be as much as or exceed the likely damages is ultimately not reasonably capable of being resolved by the funding market.

What has to be a priority in 2014 is better service delivery. The customer experience for lawyers needs to improve constantly because in 2014, more than any other year, we need lawyers to really want to make applications. That means lawyers need to experience speed, positive support and flexibility from funders and insurers. They are still the gatekeepers to good cases after all.