Litigation funding: to regulate or not to regulate?

The litigation funding market in England and Wales has grown rapidly in recent years under a largely self-regulated regime but change may be on the horizon in the aftermath of the Supreme Court's decision in PACCAR,¹ which prompted renewed public discussion about the funding industry and the extent to which it facilitates access to justice. The government has indicated that it will consider any recommendations made by the Civil Justice Council (CJC), which recently released its interim report on the subject, and which is currently running a public consultation on approaches to regulation. Once the CJC's final report and recommendations are published, the government has indicated it will consider further regulation. Meanwhile, the European Parliament has urged the EU to impose more extensive regulation of litigation funding across all EU Member States. Should the UK follow suit?

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What is third-party litigation funding?

Third-party litigation funding ("TPF") is an arrangement whereby a third-party (typically a commercial funder) agrees to cover all or part of the legal costs of a party to legal proceedings, in return for a fee if the party is successful. TPF is provided on a non-recourse basis, which means that there will be no return for the funder in the event the funded party does not win the case. The terms of these arrangements will generally be set out in a litigation funding agreement ("LFA").

Rapid growth

The litigation funding market has grown rapidly in England and Wales over the past decade. The total assets held on the balance sheets of the top 15 largest litigation funders exceeded £2bn for the first time in 2021 according to some estimates, representing a ten-fold increase in value since 2011/12. Some EU jurisdictions have seen similar growth, although none of them yet rivals the size of the market in England and Wales.²

How is litigation funding regulated in England and Wales?

Since its introduction, TPF in England and Wales has been subject only to voluntary self-regulation, with no formal regulatory oversight.³ Protections for parties involved in funded claims are afforded primarily by a combination of funders joining the voluntary regulatory body (the ALF, discussed in further detail below) and by the courts applying common law rules.

Historically, TPF was not permitted in England and Wales because of the rule against champerty, which is concerned with controlling the circumstances in which a person with no direct interest in the proceedings may exert control over them, for example, by paying some of the costs of the litigation in return for a share of the proceeds. The policy concern here is that the funder's interest in its own profit may have a distorting effect on the conduct of the litigation.

However, in 2002, the Court of Appeal ruled that only funding arrangements that 'undermine the ends of justice' should be subject to the rule against champerty.⁴ This has meant that, until very recently, it was rare for funding arrangements to be challenged in the courts.

The ALF - The Voluntary Regulatory Body

A voluntary system of regulation does exist for litigation funders in England and Wales, for those which are members of the Association of Litigation Funders ("ALF"). The majority of large, established litigation funders in England and Wales are members of the ALF. Members of the ALF must comply with its code of conduct which provides rules on capital adequacy of funders and outlines sanctions for upheld complaints against funders. The sanctions are relatively minor given the scale and value of funded litigation, including: expulsion from the ALF, the imposition of a fine of up to £500 and the payment of all or any of the costs of determining the complaint. The CJC's interim report acknowledges this weakness, noting that "it could be questioned whether a £500 limit is able to provide a sufficient deterrent" for misconduct.⁵ The interim report states that it is an "open question" as to whether all funders do or should comply with the ALF code of conduct and whether agreed best practices/principles would be most effectively given effect through amendments to the ALF code or via some other regulatory approach. It is expected that the CJC will provide further guidance following the conclusion of its consultation process.

The impact of the Supreme Court's decision in PACCAR

In PACCAR⁶, the Supreme Court reversed the findings of the lower courts, and held that litigation funding agreements pursuant to which the funder is entitled to a percentage of any damages recovered are ‘damages-based agreements’ ("DBAs") within the meaning of section 58AA of the Courts and Legal Services Act 1990. Consequently such agreements are (i) unenforceable unless they comply with the Damages-Based Agreements Regulations 2013; and (ii) impermissible in opt-out collective proceedings pursuant to section 47C(8) of the Competition Act 1998.

PACCAR led to a widespread revision of funding arrangements, a large proportion of which overnight became unenforceable. The attempts to fix such agreements in place for various significant claims in the High Court and the Competition Appeal Tribunal (the "CAT") have been or are in the process of being challenged by defendants. For example, in the Sony PlayStation class action, the CAT held (in the context of an application for an opt-out Collective Proceedings Order) that an amended LFA which provided for a funder's fee calculated as a multiple of the contractually committed funding did not constitute a DBA, even where the LFA in question also contained a contingency provision allowing for payment of a percentages of damages in the event that DBAs in opt-out collective proceedings subsequently become lawful.⁷ Successful claimants have also sought to rely on PACCAR to resist enforcement of funding agreements.⁸

The effect of PACCAR has been felt particularly acutely in the collective actions regime in the CAT because all successful applicants for Collective Proceedings Orders have satisfied the requirement that they have access to sufficient resources to enable them to act fairly and adequately in the interests of the class (and are therefore a suitable person to be authorised as a class representative) by having an LFA in place. Accordingly, there are multiple appeals on funding issues outstanding (some of which are to be heard together), impeding the progress of cases in the CAT.

What are the proposals for regulation of litigation funding in the EU?

Currently, there is no formal EU-wide system of regulation of litigation funders but, on 13 September 2022, the European Parliament voted in favour of a report titled ‘recommendations to the Commission on responsible private funding of litigation’ (the "Voss Report"). This report seeks to introduce a regulatory framework for TPF across EU member states and makes recommendations to the Commission to implement a directive which will establish "common minimum standards" for TPF in the EU. If affected, the recommendations made in the Voss Report would have a significant impact on the litigation funding market in Europe by introducing award caps, independent regulators, and disclosure obligations. It should be noted that the European Commission is under no obligation to propose any corresponding legislation in response to the report, but the recommendations paint a clear picture of the potential direction of travel towards increased regulation of litigation funding in the EU. In summary, the recommendations included in the Voss Report are as follows:

Voss Report: who will regulate and on what basis?

System of Authorisation: the establishment of a system whereby funders must seek authorisation prior to providing funding, by reference to various corporate governance and capital adequacy requirements.
Independent Administrative Bodies: the creation of an independent administrative body in each EU member state, to provide "oversight in a manner similar to that of the existing prudential supervision system applicable to financial services providers".

Voss Report: key obligations/constraints on funders

Fiduciary Duties: funders should be subject to a fiduciary duty to act in the best interests of the claimants or intended beneficiaries.
Award Cap: a proposed 40% cap on the share of the award or settlement to which Funders would be entitled, other than in exceptional and strictly regulated circumstances.
Joint Liability for Adverse Costs: funders should be jointly liable with the claimants for any adverse costs award.

Voss Report: transparency measures

Disclosure Requirements: claimants and their legal representatives should be required not only to inform the relevant court of the existence of a funding arrangement and the identity of the funder, but where the relevant court, administrative body or defendant requests it, to provide a complete and unredacted copy of the funding agreement to the court at an early stage of proceedings.
Drafting of Funding Agreements: funding agreements should be drafted in clear, intelligible terms which set out the range of possible outcomes for the claimant, as well as any relevant risks and limitations associated with the funding arrangement.

Will the UK follow the EU's approach?

Will the UK government reverse PACCAR?

The former Conservative government had intended to reverse the PACCAR decision by implementing the Litigation Funding Agreements (Enforceability) Bill. However, the Bill did not make it through the wash-up prior to the UK general election and the incoming Labour government has confirmed that it has no immediate plans to reintroduce it. The government has indicated that it will await the outcome of the CJC's review (currently due in Summer 2025) of the current regulatory landscape for litigation funding before considering any legislation.

What is the case for greater regulation in the UK?

Beyond the continuing commercial uncertainty for litigation funders and funded claimants as the courts grapple with the impact of PACCAR and concrete legislative proposals from the new government are yet to materialise, the Post Office Horizon case ⁹ has also increased public scrutiny of the TPF sector. Of the £58m settlement award made in that case (which was funded by Therium) only £12m was distributed between over 550 claimants (equating to, on average, just over £21,000 per claimant – although some may have been entitled to a higher share than others) with the remaining sum being claimed by the funders. This outcome has been widely criticised as unjust in circumstances in which many of the claimants had lost their livelihoods, and contributed to the government introducing a compensation scheme to "top-up" the settlement amounts received by claimants.

On the other hand, Sir Alan Bates, one of the former sub-postmasters and first claimant in the proceedings, has publicly stated that without litigation funding, the sub-postmasters could not have brought their case and exposed the wrongdoing of the Post Office.¹⁰ As such, the Post Office litigation demonstrates both why litigation funding is needed (because the claimants could not have brought the case on their own and it promoted equality of arms between the claimants and the Post Office) and some of the drawbacks to pursuing funded claims.

What regulatory regime might the CJC review recommend?

Following the decision in PACCAR, the Lord Chancellor commissioned the CJC to conduct a review of the litigation funding sector.¹¹ The CJC interim report, published in October this year, precedes a consultation process which will result in a final report with recommendations.

The interim report contains a survey of the different approaches taken in other jurisdictions with respect to TPF. This survey includes an overview of the EU's approach and makes reference to the Voss Report but makes no assessment of the suitability of the Voss proposals for regulation of litigation funding in England and Wales. While we await final recommendations from the CJC's review, the suggestion that the CJC might be evaluating proposals for regulation similar to those made in the Voss Report (as described above) will likely raise concern in some quarters, given the mixed response that report received.

Regulatory measures being considered by the CJC

System of authorisation/supervision by independent bodies: The CJC's stated objective is to "analyse and compare the relevant regulatory options and conclude what level of regulatory intervention seems appropriate". In this context, the CJC has specifically identified a system of authorisation ("where a formal approval is required from a public authority before carrying out specified activities, based on satisfaction of specified preliminary and/or ongoing requirements") and supervision by independent bodies ("where checking of systems or activities is required by a public or private body") as examples of the regulatory options it will evaluate, both of which were recommendations made in the Voss Report.
Award Caps: The CJC is seeking evidence on "whether and, if so to what extent a funder’s return on any third party funding agreement should be subject to a cap" and, if so, what level the cap should be set at and why. As noted above, the Voss Report proposed a 40% cap on the funder's share of the total award.
Adverse Costs: The CJC is seeking evidence on "What impact, if any, does the recoverability of adverse costs and/or security of costs have on … the availability third party funding and/or other forms of litigation funding". The Voss Report proposed that litigation funders should be jointly liable with claimants for adverse costs orders.

Do we need more regulation of litigation funders?

According to the European Parliament, the answer is a clear "yes" – hence the regulatory regime proposed by the Voss report – but only the European Commission has the power to initiate legislation and its response is still awaited. In the interim, the proposals set out in the Voss report have been subject to criticism from the funding industry due to a perceived lack of evidence-based analysis in the report.¹²

The CJC is yet to set out any proposals to reform the approach to litigation funders in the courts of England and Wales but there are suggestions that it will be far less interventionist than the EU regulatory regime proposed by the Voss report. Andrew Lenon KC, who sits as a chairman of the CAT indicated that it seems "unlikely at this stage that the CJC will recommend particularly prescriptive regulation of funding" during a keynote speech given at the Global Class Actions Symposium in November.¹³ It is also worth noting that the European Law Institute (the "ELI") published a report in October titled "Principles Governing the Third Party Funding of Litigation" which set out principles intended to constitute a blueprint for light-touch regulation of the litigation funding market.¹⁴ The report acknowledges the Voss Report's advocacy for increased regulation but notes that "prescriptive regulation" is "is only appropriate where there is an identifiable problem or market failure". The ELI project was co-led by Mrs Justice Cockerill, who is also a member of the CJC group coordinating the review of litigation funding in the UK.

To regulate, or not to regulate?

Depending on the outcome of the CJC review, and in light of the criticism that the Voss report has received from the funding industry, the UK government may be disinclined to impose further regulation on the market for litigation funding in England and Wales. Yet, the key risks outlined by the Voss Report apply equally to funded cases in England and Wales – in particular that funders will maximise their own returns at the expense of those expecting to benefit from litigation (see the discussion of the Post Office litigation above). Indeed, these risks are acknowledged in the CJC's interim report.

As for funders themselves, it might be thought that they would have little interest in being regulated more than they are at present. However, many of the claims which litigation funders are often called upon to back involve large numbers of individual claimants with limited resources. Currently, the market for those types of claims is somewhat constrained by the limited availability of procedural mechanisms for bringing collective actions on an opt-out (rather than an opt-in) basis; in practice, it is difficult to bring such claims except in the context of certain competition law damages actions. So far, the government has resisted calls to expand the competition collective actions regime to other areas, usually citing concerns that this could encourage a "US-style" litigation culture. It may be that greater regulation of litigation funders, particularly greater transparency about their role and perhaps greater powers of oversight for the courts, would help to allay some of these concerns – which could in turn pave the way for an extension of the competition collective actions regime to other areas.

How might the UK's approach differ from the EU's?

The EU's tendency to take a more prescriptive approach to regulation is reflected in some of the recommendations of the Voss report, notably the requirement for what is effectively a licensing regime for funders and the 40% award cap. The UK has often expressed a preference for what it regards as a more proportionate and market-led approach, as reflected in its better regulation principles. In particular, the danger of a "one-size-fits-all" cap on the share of proceeds that funders can seek is that it may result in funders becoming unwilling to back litigation on that basis. This might mean the UK would not feel the need for a licensing regime but could instead increase the ability of the courts to scrutinise funding arrangements on a case-by-case basis. Such an approach would be more flexible with the potential to be varied according to the circumstances of each case – and would only involve intervention where the court judged it to be necessary (beyond that, funders and claimants would be able to reach agreement as they saw fit). If the UK does take a lighter touch approach to regulation, any such regulatory divergence between the UK and the EU may affect the relative allocations of funders and the availability of funding between the jurisdictions.

Footnotes

R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28
Litigation funding from a European perspective, Deminor, July 2022
Although, following PACCAR, such arrangements will be subject to the statutory scheme for DBAs to the extent that the funders' return based on the damages award achieved (see the discussion at "Collective Proceedings Orders" below), in practice funders will almost always structure their arrangements to avoid needing to comply with that framework.
Factortame (No. 8) [2002] EWCA Civ 932
Review of Litigation Funding Interim Report and Consultation, CJC, published 31 October 2024
R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28. This firm acted for the successful appellants in this case.
Alex Neill Class Representative Ltd V Sony Interactive Entertainment Europe Ltd [2023] CAT 73
Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm)
Bates v Post Office Ltd (No 3) [2019] EWHC 606. See also our briefings: The Post Office litigation: 4 lessons for franchisors and franchisees and The Post Office Litigation: lessons for IT suppliers and customers.
Our Post Office victory is being twisted by those who don’t want to see its like again | Alan Bates | The Guardian
See footnote 5 above.
See, for example, the International Legal Finance Association report, issued in June 2023, which stated that "legislating for the recommendations of the Voss proposal would provide a charter for large companies to infringe on the rights of the smaller businesses that are the backbone of the European economy. This is because there has not been an evidence-based analysis of the legal finance sector to date and a lack of consideration of the consequences".
GCAS24: CAT chairman sets out third-party funding stance | Dippy Singh | CDR Article
Principles Governing_the_Third_Party_Funding_of_Litigation, European Law Institute, published 9 October 2024