This article, by Fraser Wright, senior partner at Quanta Capital, sheds light on the litigation funding area and divorce. Quanta Capital specialises in this area, so understandably is bullish about it. The editors of this news service are pleased to share these views; as usual, however, they do not necessarily endorse all opinions of guest writers. Email tom.burroughes@wealthbriefing.com or jackie.bennion@clearviewpublishing.com

Divorce Laws in England and Wales are going through some the biggest changes in recent history, with “No-Fault Divorce” leading the charge. The demographics of  divorcing couples has also changed dramatically in recent years, with many parties now having to deal with multiple assets, complex investments, private pensions, inheritance and jurisdictional issues arising from foreign or cross-cultural marriages.

As the complexity of separation increases, as does the importance of proper financial planning and advice. While a divorce lawyer is most appropriately placed to advise on the legal process of separation, both parties should consult a qualified wealth or financial advisor before, during and post separation to ensure that assets are split fairly and symmetry is achieved. In this article I will focus on the part that such a qualified advisor can play in this process, specifically exploring how divorce proceedings can be funded by a third party, commonly known in the industry as “Matrimonial Litigation Finance”. This piece serves as guidance only, and any financial advisor should consult their own compliance department or regulatory body before discussing financial products with their clients; this process should always be executed in tandem with qualified legal advice from an appropriate family lawyer.

What is matrimonial finance?
Matrimonial litigation finance is still in its relative infancy compared with mainstream litigation funding. However, the last five years have seen multiple specialist providers enter the market, giving broader choice to the consumer and creating a generally more competitive market. All of the providers offer a similar solution insofar as they assist divorcing clients in achieving access to justice and a fair settlement.  This is attained by preventing one spouse from coercively ‘out-lawyering’ the other in proceedings; by supporting parties that can’t afford the same legal representation as their opposition, and consequently ensuring a degree of symmetry.

If a client comes to you for financial planning advice prior to petitioning for divorce - or if they suspect their spouse is poised to issue against them - there a few things you may wish to discuss at this stage:

If your client is the more financially dominant spouse, they may have most or all of their liquid funds tied up in investments or assets. A conversation can be had at this stage as to whether the investments will yield a higher return than the cost of paying interest on a matrimonial finance loan.

If, conversely, your client is the financially dependent spouse, it is important to have the conversation regarding how legal fees will be paid at the very start of proceedings, ideally at the same time as choosing their solicitor. It is at this stage that matrimonial finance should be explored, evening the playing field for the financially weaker spouse. This creates symmetry. Although the exact amount of available funding will not be known until there is an estimated settlement, most providers will be able to arrange an offer in principle, so that the client has a rough idea of their legal budget; ultimately, this can direct the choice of solicitor. 

With the less financially dominant spouse, it may also be beneficial to go through their credit file and tidy up any discrepancies. Whilst most providers will base their lending decision on the merits and likely settlement amount, they will still run a soft search on the client’s credit file; for this reason, it is better to be prepared with explanations of any defaults or discrepancies. It may also be beneficial to go through a mortgage capacity exercise in case of a property-awarding settlement involving a property that the client wishes to remain in rather than sell.

During proceedings involving multiple properties, foreign assets/investments, trusts, and/or pensions, disbursements can begin to add up, and may have not originally been accounted for in the original fee estimate.  It may then be that whilst the client had sufficient funds originally, they now require assistance in the form of matrimonial finance. For some clients this may be the best time to actually apply for a facility, as there should be a clearer understanding of the estimated settlement.

After proceedings, once the client has received their settlement, the matrimonial finance loan will generally be repaid from the settlement before the balance is released to the client. A financial advisor can then assist with how to best manage and invest the proceeds of the settlement.

As previously mentioned, there are now around five or six main providers of matrimonial finance on the market. It is important to remember that none of the various options is a “one-stop shop”; you should advise your client to contact several providers to ensure that the most appropriate product is chosen.

The first consideration for most clients, naturally, is the cost of borrowing. Interest rates vary between providers, and whilst these interest rates can provide initial visibility on the cost of borrowing, it is also important to ascertain on what basis the APR is decided, as this figure will often include other fees associated with the loan. 

Dependent on the provider, there can also be variation in what interest is applied, such as simple interest or compound interest . It is also necessary to establish how interest is applied. Some products may apply the interest to the full loan amount, whilst on others it will be charged on a monthly basis, and applied only to the amount of the facility actually drawn down.

Consideration should then be given to the application process. Many clients who require matrimonial finance may also require practical assistance in completing a complex application form. 

The most common type of matrimonial finance loan is an unsecured consumer credit act loan, which, as the name suggests, is unsecured and generally repayable by an assignment on the proceeds of the settlement. 

Some providers will offer a secured loan, which is secured by a charge on property or other fixed asset. Careful attention is required with secured loans; if there is an insufficient lump sum figure in the final court order to satisfy the loan amount, the charge may be enforced. This can result in the required sale of the property which has the charge attached to it.

Some providers may insist that there is one drawdown at the start of the loan period, thereby incurring full interest from day one. Most providers however, will allow for the loan to be drawn down as the case progresses, either by a pre-agreed schedule or upon production of an invoice, with the interest only being applied to the drawn down amount. 

It is no secret that the family courts are facing unprecedented pressures with increasingly large number of cases to consider. As a result, delays are common and it can be challenging to estimate how long court proceedings will take. This has had a knock-on effect in the matrimonial finance space; for lenders working out the loan period, the uncertainty adds another layer of complexity when ensuring enough time is allocated to the repayment process. 

Many lenders will inform the individual and their financial advisor of any extension penalties when dealing with the terms of the loan, however, some providers may offer an incentive if, in the spirit of amicable and less contentious proceedings, settlement is achieved by the parties earlier than anticipated.

The final consideration is insuring the loan. Whilst some lenders have a compulsory insurance policy others do not. Therefore, it is worth shopping around to ensure that your client secures the right arrangement. If the divorce is particularly complicated, it is worth considering an insurance policy - this is usually a percentage of the loan amount and is added to the total loan amount or levied to your law firm. Additionally, in most situations where an insurance policy is required, the impact of which will be mitigated by the lender's due diligence process and the terms of the loan agreement. If an insurance policy is a requirement and it is felt that is not necessary in your cients’ circumstances, then it may be worth seeking other offers of finance for comparison.

Whilst many still view matrimonial finance as the outsider in the market, there is a strong case to explore it as a viable option which will strengthen your client’s hand on the divorce table.