Poor conduct of consumer claims “will see more firms collapse”

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Molloy: Law firms asking for commissions

At least 15 consumer claims law firms have gone bust in the last five years owing more than £400m and poor practices in the sector will likely lead to more, a leading litigation insurer has predicted.

Jamie Molloy, head of after-the-event (ATE) insurance at Ignite Specialty Risk, said there was no excuse for such firms to use litigation funding to pay upfront for expert reports and ATE cover.

“It’s getting to a point where such sums are being drawn down from litigation funders on day one that law firms care less about the outcome in the litigation,” he told the recent Legal Futures Housing Condition Conference in Manchester.

“That inevitably is a wheel that can’t continue forever and has ultimately led to demise of in excess of 15 law firms and probably more in due course.

“It is never going to be viable long term, particularly where we’ve now got fixed costs in a lot of these cases and the profits simply aren’t there to pay all these fees back at the end.”

The collapse of firms such as SSB Law, Pure Legal, High Street Solicitors, McDermott Smith and more has thrown a regulatory spotlight on the volume claims market and Mr Molloy pointed also to the failures in recent times of funders like Affiniti, VFS and duologi, and ATE insurer LAMP.

We reported last week a warning from the Solicitors Regulation Authority (SRA) that relationships with litigation funders were destabilising some high-volume consumer claims law firms,.

Mr Molloy argued that government reforms have squeezed an original business model focused on relatively simple cases, short timelines and good base costs, where the many successful claims paid for the small number of failures.

Not only have the cases since become “factually and legally more complex” – compare, for example, data protection and Japanese knotweed claims to whiplash matters – but there are hefty backlogs in the county court, putting significant strain on law firms’ finances.

Many of these claims were also areas lacking precedent – it is five or six years since the first motor finance commission claims were brought and only last week they reached the Supreme Court – and had “uncertainty of enforcement” as well.

Mr Molloy highlighted cavity wall insulation claims as work which “stacked up legally but ultimately failed because there was just no one to pay at the end of it”.

The end of recoverability has narrowed claimant firms’ margins and, though the majority of firms continued to operate in the right way, the changing market has led to dubious practices.

“We have seen law firms sign up to expert reports which cost significant sums of money that are neither a report nor from an expert. These people aren’t part 35 qualified, they have no experience of acting in the courts and the fees they’re seeking to charge have no correlation to the work they’re undertaking on the files.

“Furthermore, some of these instructions are happening at the outset of the case, which is leading to significant problems down the line when the court ultimately determines there’s a single joint expert needed.

“In housing disrepair cases, we’re seeing people seeking to purchase expert reports on paid upfront terms when they could go to a friendly agency and ultimately seeking to defer those costs for at least 12 or 18 months.”

Problems with ATE insurance are at the heart of the SSB scandal and Mr Molloy said one of the issues was policies with indemnity limits of £15,000 being taken out when the adverse costs exposure was two or three times that. “These people were set up for failure from day one.”

And again, though good insurers routinely offered deferred premiums, “we are seeing for no good reason funded premiums sneaking into the market which ultimately are being paid for by litigation funders and come with an associated interest cost”.

Mr Molloy continued: “These premiums might be acceptable if they are cheaper than a deferred contingent premium, but invariably they’re not.

“So why is it that law firms are continuing to buy policies and products that are not only inferior to some of the other offerings in the market, but also more expensive?”

He also complained that law firms were increasingly asking ATE insurers for commissions, which was particularly ironic given many firms’ focus on suing lenders for undisclosed commissions.

Mr Molloy suggested that while many law firms did not set out to indulge in poor practices or even fraud, such allegations were hard to avoid where there were instances of reports being funded at “obscene cost” or of ‘double dipping’, where firms were drawing down multiple loans against the same case.

He stressed that litigation funders “should be placed in the same position all of us are to work no win, no fee, and only get paid if these cases ultimately conclude”.

Funders paid as the case went along “are not sharing in the risk and therefore really aren’t aligned with the rest of us”. Put simply, he added, there was not enough margin in these cases to deliver the kind of return a US hedge fund – often the ultimate funder – expected.

Mr Molloy concluded: “At its core, ‘no win, no fee’ is a very good instrument to ensure that consumers can get access to justice. But through the recent poor practices of law firms collapsing and consumers being levied with substantial adverse costs orders, its good name is being ruined.

“And as a result, whether it be the SRA, the Civil Justice Council, or the Legal Services Board, we are now on the verge of potentially big changes in this sector that will ultimately cap costs even further and make these business models even less economically viable.”