Litigation Funding - Putting a Price on Justice?

Litigation funding, where third parties fund claims in return for a fee, has grown significantly in the past decade particularly relating to class action lawsuits, commercial disputes and personal injury cases. It has become an increasingly important ‘tool’ for claimants, especially those who might otherwise be unable to afford the significant costs association with pursuing legal action.

In April 2024, the Civil Justice Council (CJC) established its review of litigation funding and recently released its final report (Final Report). The Final Report makes 58 recommendations for the introduction of “light-touch” regulation, aimed at promoting effective access to justice and improving the effectiveness and accessibility of litigation funding.

What you need to know

With a focus on increasing access to justice while minimising the risk of exploitation, in its Final Report the CJC has recommended two waves of reform:

Legislation is introduced to clarify that there is a difference between litigation funding and contingency fee funding; and

Regulations are introduced to impose “light-touch” requirements on litigation funding, particularly for consumer claims and any form of group litigation.

Background

In July 2023, the Supreme Court in R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) [2023] UKSC 28 (PACCAR) controversially held that litigation funding agreements (LFAs) were a form of damages-based agreement (DBA).  As a result, LFAs were mostly unenforceable for failing to comply with the DBA Regulations 2013.

Litigation funding has also raised a number of concerns, including that the influence of third-party financial interests could compromise the integrity of the judicial system, potentially encouraging unnecessary litigation or creating conflicts of interest.

To address the uncertainty and concerns surrounding litigation funding, the previous Government announced the CJC’s review into litigation funding and introduced the Litigation Funding Agreements (Enforceability) Bill aimed at reversing PACCAR (which ultimately was not passed in the wash up before the 2024 general election).

Key Recommendations

The Final Report recommends two waves of reform and in doing so, notably:

1. Rejected the Financial Conduct Authority regulating litigation funding at this stage, but has suggested this should be revisited five years after the light-touch approach is introduced.
2. Noted that, generally, the terms of LFAs should not be subject to disclosure.
3. Rejected the introduction of caps on litigation funders’ returns.
4. Expressly excluded the regulations from applying to funding in arbitration proceedings.

The first reform being to reverse the effect of PACCAR by introducing legislation with retrospective and prospective effect to make clear that there is a difference between litigation funding (i.e. funding provided by third parties) and contingency fee funding (i.e. funding provided to a party to a dispute by their legal representative through a CFA or DBA). 

The second being to subject litigation funding to a formal, comprehensive regulatory scheme through regulations. There are a number of specific recommendations, including:

1. A minimum, baseline set of regulatory requirements should be introduced relating to litigation funding generally. This should include case-specific capital adequacy requirements, conflict of interest provisions, anti-money laundering requirements, and disclosure requirement of certain details relating to the funding.
2. Further “light-touch” requirements for funding of consumer claims or any form of group litigation. These requirements should include, for example, the application of a regulatory Consumer Duty, and the requirement for funded parties to receive independent legal advice regarding proposed LFAs.
3. Standard terms for LFAs, which should be developed and annexed to the regulations to improve consumer protection and reduce the cost of providing litigation funding.
4. Court approval of LFA terms, including considering whether the funder's return is fair, just and reasonable.
5. New Pre-Action Protocol (PAP): A PAP for mass claims, enhanced costs budgeting and costs management for funded collective proceedings, representative actions and group litigation. Although rejected a presumption of security for costs, although should be required if a funder breaches regulatory requirements concerning capital adequacy.
6. Mandatory costs budgeting and costs management for all funded group litigation.
7. Review of legal service regulators approach to litigation funding, particularly in terms of providing litigation loans, portfolio funding, CFAs and DBAs.

The CJC also made several recommendations to improve access to justice. For example, that the Government should consider introducing an Access to Justice Fund (which could contribute to the civil legal aid fund) and establishing a Standing Committee on Litigation Funding (which would be responsible for data collection and the ongoing scrutiny and review of litigation funding).

The CJC’s final recommendation was that all recommendations except in relation to the reversal of PACCAR can be contained in a single statute.

What’s next?

We wait with interest to see the extent of which the Government implements the Final Report’s recommendations.

If you have any questions about the Final Report or litigation funding generally, please contact Nikki Bowker or Avary Patutama.