Ethics

Today's story reports the situation of several borrowers who took money from litigation funding companies (LFCs) and wound up having to pay big sums once they collected in court.

The story reports that the LFCs, while willing, even eager, to accept regulation, resist caps. Of course, caps are the way to avoid excess return, which is THE problem the story identifies -- why the story IS a story.

But devising a formula for caps will be difficult given the different levels of risk LFCs assume in different cases. And we have plaintiffs with different degrees of sophistication, suggesting need for different levels of market regulation.

Missing from the article is recognition that that today, without LFCs, we still have an unregulated market in which the needy plaintiff can sell her claim at a discount. It is called settlement and the claim can only be sold to one buyer, the defendant, who will also want a big discount, bigger if the plaintiff is especially in need.

So, for example, the plaintiff with a good chance of recovering $50,000 in two years might, in desperation take half in settlement now. The 'return' to the defendant is higher than it would likely be for the LFC (the defendant "earns" 100% across two years).

And today the defendant is in a great position. It has no competition in the market for the plaintiff's claim if there  is no LFC. Nor are there caps on the amount of discount the defendant can demand to settle.