Legal Compliance: Why Use a Broker for Litigation Finance
In the evolving landscape of litigation finance, law firms are increasingly turning to products like litigation funding (TPF) and After-the-Event (ATE) insurance to manage risk and enhance their service offerings. However, navigating these financial products can be complex and fraught with legal risks, particularly concerning compliance with financial services laws. This is where brokers come in, offering expertise and protection to law firms. Here are the key reasons why law firms should use a broker when arranging litigation finance products:
1. Compliance with Financial Services Laws
One of the most critical reasons for law firms to use a broker is to ensure compliance with financial services laws. Under the Corporations Act 2001 (Corporations Act), carrying on a financial services business without an Australian Financial Services (AFS) licence is an offence, unless you are authorised as a representative of an AFS licensee or an exemption applies. The penalties for non-compliance are severe, including up to five years' imprisonment for individuals and financial penalties reaching millions of dollars for corporations.
Law firms risk breaching these laws if they provide financial product advice or arrange financial products for clients without the necessary licence or authorisation. Financial product advice is defined as “a recommendation or statement of opinion intended to influence a person’s decision regarding financial products.” Even if a law firm shares factual information, if it is presented in a manner that implies a recommendation, it could be construed as unlicensed financial product advice.
This can be particularly protective in the case of liquidators, who are answerable to creditors, a broker’s involvement can demonstrate that the liquidator acted independently and sought unbiased advice by obtaining external benchmarking. This can be crucial in showing due diligence and independence, protecting both the liquidator and the law firm from potential legal and regulatory scrutiny.
Using a broker helps law firms avoid these pitfalls. Brokers are licensed to provide financial product advice and arrange policies, protecting law firms from inadvertently breaching financial licensing requirements.
2. Most cost-effective solution for your clients
Engaging a broker ensures clients receive the most cost-effective solutions for their litigation finance needs. While some law firms have direct relationships with funders and insurers, the process of arranging these products often incurs additional legal costs billed at an hourly rate. By working with a broker, this expense can be largely avoided, as brokers typically arrange these products at no extra cost to the client or the firm.
Brokers also provide access to a broader market comparison by reviewing multiple funding and insurance agreements (such as LFAs) on a regular basis. This independent benchmarking ensures that clients are presented with the best options tailored to their specific case needs, saving not only significant legal costs but also reducing the time spent navigating funding and insurance arrangements.
3. Benchmarking and Independent Assessment
In the absence of a broker, it is more challenging for clients to truly measure terms offered against the market. Brokers see multiple applications each week and can identify areas where there are opportunities for improvement on across coverage, cost and claims for truly independent benchmarking.
4. Access to Established Relationships and Faster Processing
Brokers like Vie Legal have well-established relationships with key insurers and litigation funders. They understand the nuances of the market, including how appetites change with market fluctuations or capital raises. This network means that applications submitted through brokers are often prioritised and processed faster than those submitted directly by law firms.
5. Time and Resource Savings
Arranging litigation finance products can be a time-consuming process, often involving extensive administrative work to engage multiple funders or insurers. Brokers handle the bulk of this administrative burden, using their industry knowledge to quickly identify which funders have an appetite for a particular case.
6. Expert Knowledge and Market Insight
Litigation finance is a specialised and evolving market. New products, varying payment terms, financial protections, and risk management options are constantly emerging. Keeping up with these changes can be challenging for law firms whose primary focus is legal practice, not finance.
Specialist brokers, such as Vie Legal, bring deep industry knowledge and an understanding of how different factors influence cost, coverage, and claims. They know, for instance, that while an ATE insurance application can be made at any point in the litigation, securing ATE in the latter stages is more difficult and can impact the terms offered, often overlooked. By leveraging a broker's expertise, law firms can ensure they are always offering the best options to their clients, thereby maintaining a competitive edge.
Conclusion
Using a broker to arrange litigation finance products like ATE insurance and litigation funding is not just a matter of convenience for law firms—it’s a critical strategy to ensure compliance with financial services laws, access expert knowledge, and secure the best terms for clients. By partnering with a specialist broker, law firms can protect themselves against the risk of providing unlicensed financial product advice, streamline their processes, controlling legal spend foe their clients, and focus on their core legal practice while still providing their clients with access to these financial products.
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