The SRA’s new funding guidance highlights a step solicitors may be overlooking.

The SRA has recently published new guidance for solicitors using or arranging third-party litigation funding. Most of the commentary so far has concentrated on what it means for firms already working with funders: due diligence on funder solvency, disclosure of referral interests, and the management of a funded case once it is running. The point that has had less attention comes right at the start of the guidance, and it has nothing to do with running a funded case. It concerns whether the case should be funded at all.

A two-stage test, but is one stage being routinely skipped?

The guidance tells solicitors that, before a client signs up to a funding arrangement, they should assess whether third-party funding would be in that client's best interests under Principle 7. Only if the answer is yes should they go on to consider what type of arrangement suits the matter.

The first question is not “which funder?” or “on what terms?”, but whether litigation funding is the right solution at all. Too often, clients are presented with a binary choice: self-fund the claim and bear the full cost and risk of the litigation, or transfer much of that risk to a professional third-party funder at a significant price. However, the question of whether funding is appropriate for a matter cannot sensibly be answered in isolation from the available alternatives. A solicitor cannot conclude that third-party funding is in a client’s best interests without properly considering it alongside the available alternatives. An assessment that examines only one option is not, in any meaningful sense, an assessment.

The SRA’s own wording describes funding as an option where clients are unable or unwilling to self-fund legal action. This suggests that the client’s capacity and appetite to self-fund, together with the various structures and combinations available to support that approach, should form part of the discussion before a funding recommendation is made. In our experience, however, that conversation rarely happens meaningfully in commercial litigation. Where the client has a strong claim and litigation funding is the option the firm knows best, the matter may move straight to a funder without credible alternatives being explored.

The alternative to funding clients rarely hear about

For a commercial client with their own funds available to finance litigation, or even with some of their own funds available, there is a way to mitigate the financial risks of litigation without transferring litigation risk (and a large part of any potential reward) to a litigation funder: insure it.

Capital protection insurance (also known as own-fees litigation insurance) can cover a client's own legal spend (law firm fees and disbursements) if the case is lost. This is not the “before the event” legal expenses cover bolted onto commercial policies, and it goes well beyond the adverse-costs-only ATE policy most litigators are familiar with. The policy is written to cover the client's own fees. If the claim fails, the insurer will reimburse the insured client for its financial outlay. If it succeeds, the client will most often pay the premium (or the lion’s share thereof) from the claim’s proceeds, which is usually far more modest than the return a funder might expect (most often a multiple of its investment in the UK). The economics of that difference are significant. For a client that can afford to pay its lawyers as the case runs, insuring that spend will usually leave considerably more of the damages with the client than funding it would.

Furthermore, the choice between funding and insurance isn’t a binary one. A client with some but limited liquidity may choose to blend the two: self-fund and insure part of the budget, seeking funding only for the balance. Less external capital means a smaller share of proceeds will pass to the funder and can lead to a far greater net recovery for the client. In our experience, the blended structure is often the best-interests answer, and the option that is least likely to be highlighted to the client.

“Options available to them”

The guidance does not leave the informed-choice point to inference. It expressly engages paragraph 8.6 of the Code of Conduct, under which clients must be in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them.

A client who signs a funding agreement without being told that insuring their own spend may be possible has not chosen between options. They have taken the only option they were advised of.

There is an independence dimension as well, under Principle 3. The guidance recognises that portfolio facilities, referral arrangements and financial interests in introductions may create incentives or conflicts that firms must identify and manage. A portfolio funding line, for example, may make an existing funding route particularly visible or convenient, even where other structures could produce a better outcome for the client.

The guidance does not expressly require firms to produce a comparison of self-funding, insurance and third-party funding in every case. However, a documented assessment of the available alternatives would provide a practical way to demonstrate that the recommendation was made independently, that the client’s best interests were considered and that the client was placed in a position to make an informed choice.

What the guidance does, and does not, say

To be precise, the guidance does not mention capital protection or own-fees insurance, mandate any particular product or create a new rule.

However, it does not need to expressly name all the options available to clients for the issue to arise. What it does is bring the threshold question of whether funding is in the client’s best interests expressly within the solicitor’s regulatory assessment. It also connects that assessment with whether the client is unable or unwilling to self-fund and with the client’s right to understand the options available. For a commercial client capable of meeting some or all of its legal spend, that framework should naturally prompt consideration of whether the risk could instead be insured.

Our view (and it is not a new one) is that solicitors can turn to funding too readily, particularly where commercial clients could carry some or all of the cost themselves. The guidance does not itself say that, nor does it expressly require a comparison with own-fees insurance. But it creates a framework in which recommending funding without considering credible alternatives may be increasingly difficult to justify, both as a best-interests decision and to a client who later sees a substantial funder return deducted from its recovery.

The practical takeaway

Before the next funding recommendation goes out, three questions are worth asking, answering and recording on the file. Can this client self-fund, in whole or in part? If so, what would it cost to insure that spend rather than fund it? And if funding is needed, would a blended structure reduce the amount of expensive capital in the matter?

Where those questions are asked and answered, a solicitor will be in a much stronger position to demonstrate the best-interests assessment the SRA now expects. Where they are not, going straight to a funder without considering credible alternatives may become increasingly difficult to justify.

TheJudge Global is an independent broker of litigation insurance and acts on behalf of clients. If you'd like to understand what own-fees cover or a blended funding-and-insurance structure might look like on a live matter, get in touch.