Debt collection and damages based agreements

We live in exciting times. From 1st October 2015, the SRA will gracefully relinquish its role in regulation firms which act in the debt collection market, and pass the baton onto the Financial Conduct Authority (FCA). “Debt collection” is now a portfolio term, which covers many activities only tangentially related to sweating cash out of people.

Solicitors in this field are already anxiously considering the regulatory position, and how regulation under the FCA will differ from the lighter touch currently applied by the Solicitors Regulation Authority (SRA).

Another issue, that frequently arises in the debt collection industry, is the retainer used by solicitors when pursuing debt recovery action.

Damages based agreements (DBAs) are (or rather should be) ideally suited to use by solicitors acting in bulk claims for institutional clients on a contingency basis, taking as their remuneration a share of the funds recovered, their fees directly and proportionately aligned to the sums in dispute and their remuneration in perfect accord with the interests of their client.

However it does not work like that. Of all the reforms implemented in 2013, cases involving damages based agreements which have landed on my desk have caused the biggest problems.

Even assuming an agreement is drafted which complies with the requirements of the Damages Based Agreements Regulations 2013, the agreement’s use can prove problematic, in at least three aspects.

The first is the fact that the concept of the Collective Damages Based Agreement, is absent from the regulations. No one is sure whether you can have a single agreement which applies to 10,000 individual debt recovery claims, and even if you theoretically can, drafting such an agreement to comply with the obligation to specify the proceedings to which it relates could prove problematic.

A second problem, is that if a client decides to dispense with a solicitors services half way through the case, unlike the position under a CFA, which can contain comprehensive provisions for the solicitor to be paid immediately on termination of the retainer, a DBA may not contain such provisions, due to the restrictions on payment in the regulations.

Thirdly, and perhaps most importantly, the adoption of the Ontario model, can act perversely. A £15,000 debt claim where the fee under a DBA is set at 25% of the sums recovered, can act to cap the solicitors fee at £3750 as such agreements are subject to the indemnity principle. This  could problematic, if that claim is disputed, allocated to the Multi-track and concludes at trial, after £20,000 of time is spent pursuing it.

In the meantime, the regulations are being reviewed by the Ministry of Justice.

The 2013 Regulations may be scrapped and there is even talk of dispensing with the Ontario model, in favour of a hybrid CFA/DBA retainer. But there is no timeframe that I can discern as to when or if this will come to pass.

So what is the solution in the interim? I generally advise my clients to pass swiftly over a damages based agreement as an option, and instead utilise a Collective Conditional Fee Agreement Lite, which provides through a series of carefully drafted waivers, that the client remains liable to pay the solicitors fees and disbursements, but the solicitors waive the right to enforce their claim to those sums, to the extent they exceed 25% of the damages recovered.

A tried and tested formula, which ensures that the solicitors get paid, either out of costs or sums recovered, and the client retains at least 75% of the proceeds recovered for him.

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