PRIVATE banks are queuing up to offer “divorce loans” to help women with the costs of splitting from their husbands.
In return, they hope to be able to manage the woman’s assets once her divorce settlement comes through.
Women have become big business for private banks following two landmark divorce cases in the House of Lords last month that boosted the payouts women can expect when their marriages break down.
In one of the cases Julia McFarlane, who had been married to her husband, Kenneth, for 16 years, was awarded £250,000 a year for life — just over a third of his income. The term of the award was raised from five years, and was well in excess of her “reasonable needs”, to compensate her for sacrificing her career to raise their three children.
In the second case, Melissa Miller, who had been married to her husband, Alan, a fund manager at New Star, for fewer than three years, was awarded £5m of his £17.5m fortune.
But while women can expect bigger payouts once a divorce is settled, many struggle to pay the legal fees while the case is continuing.
A big-money divorce could cost anything from £20,000 to £100,000 in fees, depending on its complexity, and lawyers usually ask you to pay monthly, or in regular instalments.
Very few will allow clients to pay the entire fee out of their settlement in case they withhold payment.
This is where divorce loans come in. A private bank will lend you the money to cover the fees, which must be repaid from the eventual settlement. Duncan Lawrie, for example, recently launched a “matrimonial dispute loan” that will be open to anyone, not just existing clients.
Butterfield Private Bank has also extended its divorce loan to new customers and will offer £50,000 to £150,000, compared with only £50,000 previously. Coutts, the Queen’s bank, and HSBC Private Bank offer similar services.
The banks insist these facilities are open to both men and women, but they admit that, in reality, they are used primarily by women.
Peter Ostacchini, head of banking at Duncan Lawrie, said: “Many parties involved in a divorce are in a catch 22. They know they will receive a good settlement, but they have no means to pay legal fees, or in some cases household expenses.
“Sometimes the woman may stay in the matrimonial home and the husband may continue to pay the bills, but he is not going to pay her legal fees. In others, the woman may have left the home and have no money to cover living expenses, let alone legal fees.”
The main difference between a matrimonial-dispute loan and a personal loan from a high-street bank is that the former are generally interest-only. The capital is in effect secured on the matrimonial assets and must be repaid when they are divided up.
Personal loans, however, are generally unsecured and you must repay capital as well as interest, which generally leads to higher monthly repayments.
Duncan Lawrie charges a one-off fee of 1% when you take out its divorce loan, plus interest of two percentage points above base rate, which is 4.5% at present.
Butterfield charges between two and five percentage points above base rate — 6.5% to 9.5% — depending on the complexity of the case.
The cheapest three-year personal loans on the high street cost 5.6%.
Butterfield allows you to “draw down” the loan only when your lawyer’s instalments become due, so you pay interest solely on money you have used.
Lawyers generally welcome divorce loans. Meredith Thompson of Mills & Reeve said: “They are a good way for impecunious women to afford good legal representation.”
The catch, however, is that the private bank will expect to manage your assets once the divorce settlement comes through, although you are unlikely to be tied in.
Advisers suggest you check the bank’s investment management fees and performance before signing up for the loan, in case you feel under pressure to take its services once you get your payout.
Duncan Lawrie charges 1% a year plus Vat to manage your funds, with a minimum of £250 every four months. It will buy a portfolio of shares and bonds with your money, but not investment funds. Its dealing fees for shares are up to 1.5% of the trade, depending on its size. There are a number of other fees, so check the small print.
Coutts, on the other hand, buys a portfolio of investment funds, not individual shares, and charges a management fee of 1% a year plus 0.85% for the underlying funds.
Advisers say assets awarded as part of a divorce settlement should be managed conservatively, especially if a woman has been awarded a large capital sum but has no other sources of income and will therefore need to live off those assets for some time.
Keith Martin of Coutts said: “The management of a divorce payout will depend on whether it is a ‘clean break’ settlement, with only capital awarded, or if the client received a capital sum with an income. It is also quite often the case that the client has little or no experience in dealing with financial matters, and needs advice on general cash management as well as asset allocation.”
It is difficult to compare the performance of private banks because clients generally have bespoke portfolios, but a service called Pam Online can help. It gives awards to the best banks in certain categories.
This year, Merrill Lynch won its award for the best manager of cautious and balanced portfolios, while Jupiter Asset Management won for growth portfolios. Visit pamonline.com for more details.
