The Solicitors Regulation Authority (SRA) has warned firms over loan advice after claims emerged from clients who say their solicitors pressured them into high-interest loans to finance their divorce proceedings.
The SRA reiterated its code of conduct which states that clients must know about links between lenders and firms, and that firms must not abuse their position. A spokesperson said:
“Third-party funding has a legitimate place in legal services and has a role to play in improving access to justice, including through legal aid. However, borrowing against a legal outcome will always carry risk and solicitors have a duty to make sure their clients are fully aware of this risk and have sought independent advice in circumstances of conflict.”
It is said that clients – many of whom using lender Novitas Loans – have taken out loans to fund litigation without proper checks or due diligence, going on to rack up huge amounts of debt and becoming liable to lose their assets as a result.
The Gazette reported that “[over] a dozen people have claimed… that they felt compelled to take out the loans with Novitas, a subsidiary of Close Brothers, to fund proceedings in the last 10 years”, adding that the former clients “borrowed from £20,000 to £350,000 at an annual interest rate between 18% and 30%”.
Regulators from the financial and legal sector are said to be investigating. In July, it emerged that Novitas was ordered by the Financial Ombudsman Service (FOS) to end a lending agreement with a client and cap her liability at £1,745, after a finding that she was “pressured” in relation to a £45,000 loan at 18% interest to fund legal proceedings in a separation matter. Her solicitor refused mediation with “no reasonable explanation”.
The deal involved a firm of solicitors that had pressured the client into signing up for a Novitas loan and subsequently obstructed mediation between the client and her former partner. Following investigation, the FOS found that Novitas had not made sufficient checks before approving the loan and concluded it would not be fair or reasonable for the client to pay interest fees or charges.
One borrower from Novitas told The Gazette:
“I was told the only way to receive legal help was to have this Novitas loan. It is only now I look back and realise how awful it was. I was scared, vulnerable and didn’t really question it.”
Novitas offered lending for family law, contentious probate and clinical cases, but posted £50m in annual losses and is no longer undertaking new business within the legal sector. It said that it will continue managing its existing customer base and cases, and will consider applications for extensions, but will not take on any new customers going forward.