As the litigation funding industry continues to evolve, Louisa Klouda, CEO of Fenchurch Legal shares insights into the sector and Fenchurch Legal’s approach and practices.
Below is our LFJ Conversation with Louisa Klouda:
What drew you to the world of litigation funding?
My entry into the world of litigation funding wasn’t a direct one, but rather a spark of curiosity during my previous role in corporate finance and the asset-backed lending world. I came across the concept of litigation funding and found myself instantly drawn to its unique characteristics. I discovered a market dominated by large funders focusing on large cases like class actions. However, I noticed a significant gap: a lack of support for smaller claims, particularly in areas like housing disrepair and the challenges the law firms faced in accessing funding for these meritorious claims.
Recognizing the gap in the small-claims market, I saw an opportunity to create Fenchurch Legal in 2020. The aim of the business was twofold: to facilitate access to justice for smaller claims and to provide an avenue for investors looking for alternative investment opportunities.
Can you provide an overview of small ticket litigation funding and its significance in the UK legal landscape?
Small ticket litigation funding plays a vital role in the UK legal landscape, offering an alternative approach to financing legal claims. In essence, it involves providing funding to law firms for smaller value cases across various areas like personal injury, housing disrepair, and financial mis-selling, unlike large-ticket funding which targets high-stakes class actions.
Small-ticket funders like Fenchurch Legal focus on quantity, funding a high volume of smaller cases. These case types have clear legal precedent, and are protocol-based and process-driven consumer claims, with high success potential.
This subset of litigation funding addresses a gap in the legal financing ecosystem created by rising legal costs and resource-intensive cases. Small ticket litigation funding ensures that even modest claims, like housing disrepair receive the backing necessary to navigate the legal process, ultimately facilitating access to justice and contributing to a more balanced and inclusive legal landscape.
How does this subset of litigation funding attract investors?
The appeal of small-ticket litigation funding to investors is multifaceted, driven by three key factors – flexible entry points, portfolio diversification, and unique security features.
Firstly, it provides investors with lower entry points compared to larger funders. This is particularly attractive to those moving away from traditional markets and seeking a more balanced investment approach with steady returns. The accessibility of smaller minimum investment amounts aligns with the preferences of investors aiming for a diversified and resilient portfolio.
Small-ticket funders focus on quantity, funding a high volume of smaller cases. This diversification approach effectively spreads the risk across various law firms, multiple cases and case types, reducing the reliance on the success of a single case. Investors are drawn to the stability and risk mitigation inherent in this investment strategy.
Moreover, investors like the insurance-backed nature of this investment. All cases are supported by an After the Event (ATE) insurance policy, covering all costs and disbursements if the case is unsuccessful. Additionally, upfront interest is charged, debentures are in place and there is an assignment over the case proceeds.
How has Fenchurch emerged and established itself in this market, and what key strategies contributed to its growth?
Our key strategy is to have a niche focus on smaller claims within specific case types where we have a deep understanding and only partnering with fully vetted law firms.
Recognizing growing interest in litigation funding as an alternative asset class, Fenchurch strategically lowered investment entry barriers making it a more accessible investment solution. This has enabled us to broaden our investor base, enabling us to raise more capital and support a wider range of law firms seeking funding.
How have you seen the landscape of small ticket litigation funding evolve, and what trends do you anticipate for the future?
There’s a noticeable shift towards recognising the significance of smaller-scale claims in the funding market.
I anticipate the market to continue its expansion into new case types beyond traditional areas but with that will come changes in the regulatory landscape, potentially impacting market dynamics and requiring adaptation from funders.
As a funder specialising in small ticket claims, especially those funded at volume, staying ahead of regulatory changes is important. We remain cautious about specific case types, recognising that shifts in litigation trends could render a case type unviable, as witnessed in the Road Traffic Cases (RTA) cases when fixed costs were brought in. Funders must develop a broad network of contacts to stay informed about evolving market conditions.
Another trend I see growing is wider tech adoption within the industry. Technology is playing a pivotal role in streamlining processes, enhancing risk assessment and driving efficiency and scalability. Recognizing the limitations of off-the-shelf solutions, we developed our own loan management software, providing a bespoke platform for managing loan repayments, monitoring, and onboarding. Continued tech integration is needed to enable automation, boost efficiency, enhance risk assessment capabilities, and improve investor reporting.
I also see increased awareness and interest from investors. I think small-ticket litigation funding will become increasingly more attractive as investors become more familiar with the potential benefits and opportunities, resulting in a rise in investment inflows.
Lastly, the focus on Environmental, Social, and Governance (ESG) considerations is likely to gain prominence, influencing investment decisions and funder strategies. The growing recognition of the value and impact of small-ticket litigation funding aligns with ESG requirements.
What sets Fenchurch Legal apart from other funders? What are your unique value propositions?
Our core strength lies in our deep understanding of the small-ticket claims landscape. We have developed a rigorous and data-driven selection process tailored to this specific segment, allowing us to identify top-tier law firms and high-potential case types with lower individual risk profiles.
Through discussions, we’ve learned that law firms often face challenges with other funders, including issues like complex drawdown procedures, undisclosed fees, and the non-funding of crucial costs like WIP capital or case acquisition expenses. Recognizing these pain points, we’ve developed an offering specifically designed to avoid these issues.
As mentioned before having access to our own proprietary software has been a game-changer. It has significantly enhanced our whole business operations, driving efficiency and enabling us to scale. This technological edge not only sets us apart but also positions us as an innovative and forward-thinking player in the industry.
Additionally, our team is a vital component of our unique value proposition. Made up of experienced professionals who understand the industry, our team ensures we look thoroughly at both legal merit and financial viability. This dual expertise ensures that every funding decision is based on a thorough understanding of the legal intricacies and financial soundness of each case.
Could you elaborate on your approach to case selection and investment criteria?
Our selection process is multi-layered, considering both legal merit and financial viability. In the initial stages, we conduct an in-depth evaluation of case strength, law firm expertise, financial strength and claim history, while also examining the specific legal and procedural landscape surrounding each claim.
After completing the underwriting process, we grant each firm a facility limit. They can regularly draw down against this limit, as long as they adhere to the terms of the agreement, including providing a list of claims for auditing and granting us access to their systems.
We also employ robust financial modelling and stress testing to evaluate potential returns and manage risk effectively. This approach ensures we invest in case types with strong success potential and manageable risk profiles.
So far, we’ve funded various case types with strong merits, including Plevin, Motor Finance Mis-selling (PCP), Tenancy Deposit Schemes, and Housing Disrepair claims. Our compliance criteria for each case type involve thorough vetting, examining details such as case referrals, fee earners, and the experience of law firms. This process enables us to partner with trusted law firms, further mitigating risks associated with our investments.
Importantly, Fenchurch Legal only provides funding for cases where After the Event (ATE) insurance has already been obtained. This insurance covers costs and disbursements in the event of an unsuccessful claim. By advancing the premium directly to the ATE Insurer, we ensure that each policy is live at the time of funding, adding an extra layer of security to our investment strategy. This unique security feature enhances the attractiveness of funding ATE claims, aligning with our commitment to minimising associated risks.
The recent PACCAR ruling in the UK has sparked discussions about the future of litigation funding. What are your thoughts on its implications and potential impact on the industry?
The recent PACCAR ruling didn’t impact Fenchurch as our small ticket business model is focused on charging a fixed return per case, regardless of the outcome and not a percentage of damages recovered. However, whilst the ruling presents certain challenges, I believe it ultimately presents an opportunity for the industry to strengthen its practices and regulations.
Could you share your vision for Fenchurch Legal’s future growth and expansion plans?
We plan to maintain our focus on small-ticket litigation funding, leveraging our experience, growing our loan book, and onboarding new borrowers. As the business grows, we plan to deploy more capital aiming to reach a loan book value of £75 million within the next two years. We will also recruit key roles to bolster our team.
Lastly, for investors considering small ticket litigation funding, what key factors should they take into account, and how can Fenchurch Legal add value to their investment strategies?
For investors contemplating small ticket litigation funding, several key factors should be carefully considered to make informed and strategic decisions.
Firstly, understand the specific criteria and due diligence processes the litigation funder uses and pay attention to their track record in managing and funding small ticket claims. Risk management is vital and investors should seek funders with robust strategies in place. This includes an assessment of how the funder mitigates risks associated with smaller claims and adapts to changing circumstances.
In the case of Fenchurch Legal, our approach to small-ticket litigation funding is grounded in a commitment to comprehensive due diligence, case assessment, and risk management. We have created an offering suitable for investors seeking diversification, lower risk profiles, access to a broader market, and lower entry points.
