Litigation funding: to regulate or not to regulate?

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"). 

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.

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:

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 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. 

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.