To the critics of Litigation funding, who claim it increases litigation and unmeritorious claims, according to the Productivity Commission: “the evidence that there has been an increase in unmeritorious claims is weak and concerns do not appear to relate to the activity of litigation funders, but to the underlying laws and rights to which they facilitate access.”
Litigation funding is a self-sustaining model for access to justice that does not require government funding. If it is to play an increasing role in access to justice arrangements, it is worthwhile having a look at how the funding business model works.
Fortunately, we have a real life case study, being IMF Bentham’s most recent (December 2016) half year report.
If you are going to fund litigation, you need funds. In April 2014, the company borrowed $49 million at the bank bill rate plus 4.2%. In April 2016, the company borrowed a further $32 million at 7.2%.
In the half year, IMF Bentham paid interest of $2.8 million.
A litigation funder is like a bank. Instead of lending money to people who want to buy a house or finance a business, it lends money to claimants in a legal dispute.
Just like a bank has to assess the creditworthiness of a loan to a home buyer or business, a litigation funder has to assess the creditworthiness of a legal claim.
The six months to December 2016 saw a more than healthy return for IMF Bentham’s past lending decisions.
At the beginning of the half year (1/7/16) the company had $142.5 million of cash. At the end of the half year it had $166.1 million.
This is an increase of $23.5 million or the equivalent of an annual return of 33%. The cash at the end of the half year is after overheads and interest and all other costs.
That is a very nice return. The company does admit that the results will vary depending on settlement activity in each reporting period.
Essentially, the litigation funding business model is that of a highly specialised financial institution. It is a financial services business model.
If government sources of funding for Access to Justice continue to dry up, the financial services model may be relied upon even more, and extend into areas of law not yet touched by such activity.
*Access to Justice Arrangements, No. 72, 5 September 2014