Financial advisors must make sure their legal counsel is up to speed with the options available.
According to forecasts, 2017 is set to be a record-breaking year for commercial disputes, and FDs and financial advisors need to consider carefully their approach to the handling of “litigation risk” on their balance sheets.
Moreover, they need to stay updated, through their legal advisors, about new avenues for litigation funding as this market continues to evolve at a fast pace. Increasingly innovative models are being used for bigger and bigger ticket litigation.
Since its real emergence five or six years ago, third party litigation funding has become a key lifeline for many litigants pursuing often sizeable damages claims. The existence of the industry seems certain assured (perhaps even mainstream) in jurisdictions where it is accepted and it is set to expand in jurisdictions where it is either currently prohibited or the position is not sufficiently clear. So where next for this seemingly booming industry?
During the course of 2017 onwards there may be a shift in terminology when defining the litigation risk transfer market. The usage of the term “third party funding” is likely to diminish.
Instead, “Litigation finance” or “legal finance” could dominate, as the industry seeks to demonstrate a more diverse range of offerings beyond the pure financing of legal fees for one-off legal disputes.
Funders are promoting a variety of finance solutions, including: financing legal costs; working capital for businesses involved in a dispute (by using their claim as security for the lender); monetisation solutions for clients who want to sell their award; portfolio financing solutions for law firms and in-house corporate counsel. The list goes on.
A competitive market now exists not only on a macro but also micro level. For example, a company seeking to monetise a $1bn (£780m) award will need a very different funder selection than a liquidator seeking to sell a $2m claim. No one funder is a one-stop shop or indeed participates in all sectors. Financial controllers need to ask the question of their advisors to make sure they are up to speed with all the options out there.
The market’s challenge
Appealing to corporate counsel is important for many funders to distance themselves from being labelled as a solution purely for distressed and illiquid claimants. The market is acutely aware that for scalability it needs to appeal to the corporate world where currently the vast majority of businesses are still self-financing. But penetrating this market with traditional models is not without challenge.
Many large businesses will still be concerned about an external fund exerting any control over their affairs, even though the funder’s influence is in practice actually fairly limited. The cost of funding, particularly that applied for financially distressed claimants, may be too rich for in-house counsel to justify to boards. So to appeal to GCs en mass, there will have to be tangible price incentives.
With the sheer volume of funders in the market, competition through pricing is increasingly fierce, provided funders are put or at least perceive they are in a competitive tender scenario.
A promising future for in-house counsel and financial controllers of large enterprises
These challenges for the market are all good news for prospective business claimants.
For large enterprises with strong balance sheets embarking on litigation, the options are even more extensive. Their driver to consider this industry might not be cash flow but risk management.
Controlling the legal spend, achieving as much budget certainty as possible and mitigating unexpected financial surprises are often more important than liquidity. The cash can often be called – the priority for many in-house counsel is to make the case that the cash can be used with maximum efficiency.
Litigation insurance for the claimant’s own legal spend helps achieve much of this certainty. Many funders already have insurance protecting their investment capital. The same opportunities exist for corporate counsel.
Whether the legal budget is £500,000 or £20m, it could be possible to insure the exposure against an unsuccessful outcome, which means if the case loses, the insurer reimburses the fees and expenses paid. This shouldn’t be confused with adverse cost insurance, which is a separate product. Furthermore, the premium payable is often only payable if the case succeeds, for example, lose and no premium is payable and the insurer pays a claim.
At today’s prices the cost of insurance is typically less than a third of the cost of most third party funder’s fees. For businesses accustomed to self-financing disputes, this is perhaps a more natural first step into the world of “legal finance” and one that overcomes many of the immediate barriers preventing greater usage of existing third party funding models. It’s certainly a key product lawyers ought to be advising every new client to consider, not least because it could have greater immediate applicability to a wider spectrum of litigants, especially larger enterprises.
It’s imperative all claimants, large and small, appreciate all the options available, and how they impact on the net recovery retained, so that they make informed decisions about whether to choose litigation funding and in which form. Unfortunately, not all lawyers are keeping pace with market developments, which means in-house counsel and financial controllers may well have to keep a direct eye on the industry – or have someone else do it for them.
By Matthew Amey
Published in Economia