The Ethics of Recommending Pre-Settlement Funding
Some lawyers understand that pre-settlement funding could help their clients get access to settlement money sooner, but have ethical or logistical concerns preventing them from recommending it. But is there truly an ethical issue with pre-settlement funding?
The Ethical Dilemmas of Pre-Settlement Funding
Let’s start by outlining some of the ethical dilemmas you might face when deciding whether to recommend pre-settlement funding to clients.
- Legality, rules, and regulations. While pre-settlement funding is mostly unregulated, there are some states and areas with restrictions for how legal funding can be provided.
- Financial impact. You’ll also want to consider the financial impact that pre-settlement funding could make on your client. In many cases, legal funding is financially advantageous; clients get access to their money immediately, relieving stress and allowing them to pay their bills. But bad fee structures and predatory practices could be a detriment.
- Information disclosure. In a similar vein, it’s important to ensure that your client fully understands what pre-settlement funding is and how it operates. That means working with them to help them understand the process – and recommending a legal funding provider that’s honest and transparent.
- Conflicts of interest. This one should be obvious, but you’ll also want to avoid conflicts of interest. You shouldn’t be paid to recommend legal funding to clients, nor should you partake in any activities that would be frowned upon by a review board.
Let’s explore each of these points in turn.
Legality, Rules, and Regulations
There isn’t much to say about this category. If you live in an area where pre-settlement funding is not legal or if there are strict rules that prevent legal funding from being used conveniently, you won’t want to recommend it to clients.
If you’re concerned because you’re unfamiliar with the process of pre-settlement funding and you don’t want to recommend something to your clients you are not confident about, it’s important to do your own research and come to your own conclusions about its legitimacy and the benefits it might provide.
Next, you’ll want to consider the financial impact that the pre-settlement funding could have on your client. Ideally, the advance will help them immediately. But there are several variables to consider here:
- Interest rate vs. fixed fee. Most pre-settlement funding providers charge an interest rate for the advance. In this case, the amount of money your clients owe will gradually increase and often compound over time; in some cases, clients could end up owing far more than they originally borrowed, leaving them in more financial distress than they started with. In most cases, it is best to find a provider who charges a one-time fixed fee, so clients know exactly how much they’ll owe when the loan comes due.
- No settlement received. What happens if your client doesn’t win their case? What happens if they’re not awarded a settlement? Legal funding is provided based on the idea that your client will receive a settlement in the future. If they don’t get that money, will your client still owe any money back to the funding provider? Fortunately, most pre-settlement funding is non-recourse. Any provider that you recommend should make it clear that the money will not need to be repaid if no settlement is awarded.
- Repayment. This one should be the same across all providers but make certain the funds are only due back after the settlement is awarded. There should never be any payments required before settlement. Also it is important to understand what happens if there is a settlement but it is smaller than anticipated? Will the funding provider be willing to take a reduction?
It’s also important to maximize transparency – which is a responsibility that falls on both you and the pre-settlement funding providers you recommend.
Here are some ways to improve your information disclosure:
- Only recommend transparent providers. For starters, only work with pre-settlement funding providers that you trust to provide full information. Do your due diligence ahead of time and make sure your provider of choice is upfront and honest about their lending practices.
- Be willing to answer questions. Try to explain how pre-settlement funding works to the best of your ability – and be willing to answer any questions your clients may have. Some questions may be better suited for a legal funding provider, but it’s still important to provide the best service you can.
- Provide suggestions and perspective. You may not be in a position to give your clients formal financial advice, but you should be able to provide them with suggestions and perspective. You can help them think through the variables of their case – and help them feel more confident in their eventual decision.
- Stress the downsides. Don’t sugarcoat the risks and downsides of legal funding. It’s a solid financial move in most cases, but that doesn’t mean it’s a universal, indisputable “good” thing. Make sure your clients understand the potential negatives associated with this type of advance.
Conflicts of Interest
This is the simplest ethical dilemma to avoid. The American Bar Association outlines conflicts of interest in great detail, summarizing, “Even where there is no direct adverseness, a conflict of interest exists if there is a significant risk that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer’s other responsibilities or interests.”
In other words, recommending legal funding should not, in any way, interfere with your ability to provide appropriate service to your clients. As long as you’re not lying, taking bribes, or formally partnering up with a legal funding provider, you shouldn’t have to worry about this. Work with your clients’ best interests in mind.
How to Get Started?
If you find a pre-settlement funding provider that you trust and you go out of your way to ensure your clients have all the information they need to make a proper decision, there should be no remaining ethical issues related to legal funding. If you’re interested in learning more about pre-settlement funding, or if you’re looking for a provider to recommend to your clients, contact us today!