Lawyers are in the spotlight amid growing concerns about how vulnerable clients have been sold loans to fund family litigation. It is alleged that the loans were offered without proper checks and due diligence.
Former divorced clients said they were pressured by their lawyers to borrow exorbitant sums, leaving them saddled with massive debts and, in some cases, losing their homes.
More than a dozen people told the Gazette they felt compelled to take out loans from Novitas, now a subsidiary of the Close Brothers merchant banking group, to fund the proceedings over the past 10 years. They borrowed from £20,000 to £350,000 at an annual interest rate set between 18% and 30%.
Financial and legal regulators are reportedly investigating – so far unsubstantiated – allegations of misconduct.
In a confirmed case last year, the Financial Ombudsman Service found a client had been ‘forced’ into taking out a loan by her solicitor, who had refused the divorced couple’s requests for mediation without ‘any reasonable explanation’ . The anonymous law firm was also found to have provided incorrect information to Novitas and the client about the status of the divorce.
The notice said the lawyer had been dishonest in his dealings with the client, adding: “If things had gone as they should have, Miss H would probably have ended up going to mediation and incurring costs of up to 1,745 £.” In the event, the issues were disputed and the client borrowed £45,000 at 18% interest. The debt was canceled and any reference to it was removed from the complainant’s credit history.
The volume of complaints and disturbing stories about the involvement of a lawyer indicates that this may not be an isolated case – and suggests that the profession as a whole might want to ask how such practices could have happened. continue for so long. Novitas ceased undertaking new business with the legal sector last year after posting £50million in annual losses.
“I was told that the only way to get legal help was to have this Novitas loan. It’s only now that I look back and realize how awful it was. I was scared, I was vulnerable and I didn’t really question it’
Former legal services clients who shared their experience with the Gazette say there was little checking to see if they could repay the loans. They also claim that little or no attempt was made to ensure they took independent legal advice.
Some of those people had to sell their homes to settle their debts, while in one case a client was sued in county court after signing a loan agreement she claims she barely understood.
“I was told that the only way to get legal help was to have this Novitas loan,” said one woman. “It’s only now that I look back and realize how awful it was. I was scared, I was vulnerable and I didn’t really ask myself questions.
An informal support group has been created for people to share their experiences and find the best way to manage their ongoing financial commitments.
Novitas has been a leading lender to the legal profession over the past decade, funding personal injury cases, litigation and – especially since most family law cases have been barred from the legal aid – divorce cases. Dozens of companies had regular deals with Novitas before the lender abruptly halted all new activity. Last month the Gazette revealed that Novitas Loans had set aside £6million to compensate customers following a review of historic cases.
The reasons for the refunds are still unclear, but former clients come forward with a litany of complaints about how they were treated after approaching lawyers for help with their divorce.
Many say they had access to capital but were told they would have to take out a Novitas loan if they wanted to continue to be represented. A client alleged that he was offered a loan on his first call with lawyers and that funding was approved instantly even though he had other debts at the time. He said the first £50,000 loan was presented to him as a ‘contingency’ to cover unforeseen costs, but was spent by his solicitors. In another case, the customer was allegedly encouraged to take out a loan of £100,000 which was spent in four months.
Several clients say they were told not to bother with mediation and were encouraged to take cases to final hearing. A recurring theme is that clients were told that their spouses were difficult or contentious, and that funding was needed to match them. One woman said she was encouraged to borrow £60,000 almost immediately after meeting lawyers who said they were not prepared to act without it. Her divorce took a total of nine years to resolve.
“My lawyer kept reminding me that I was going to run out of money,” one client told us. “Every time she spoke to me, it was about money. But the loan was like an open checkbook’
Customers who were offered loans were to be told to seek independent legal advice, but many told the Gazette it was a token effort – if it had been done at all. A potential borrower said she was accompanied by her lawyers to a nearby business and had to sign the paperwork, after allegedly receiving independent advice in an open room next to reception.
Clients alleged they had paid no fee or a nominal fee of £10 to solicitors who were supposed to offer independent advice. In one case, a woman in the position later found out that the company offering such advice was also arranging loans with Novitas.
Clients’ homes would have been overvalued to allow for a higher loan. Another client told the Gazette that his attorneys rarely put anything in writing about loan matters, preferring to discuss such matters over the phone. “My lawyer kept reminding me that I was going to run out of money,” one client told us. “Every time she spoke to me, it was about money. But the loan was like an open checkbook.
There are still potentially hundreds of customers who have not yet settled their debts. Novitas’ most recent financial accounts show the company has assets of £183m, most of which will be unpaid loans.
The Gazette understands that the Lawyers Regulatory Authority is investigating several complaints about the conduct of lawyers in arranging divorce funding. Since 2012, 20 complaints have been filed with the Financial Ombudsman Service regarding Novitas Loans Ltd. Less than half were accepted.
The Gazette approached Novitas for comment.
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