Should litigation funders still be worried?

These are interesting times for the litigation funding industry.

On the one hand, the government is delivering on its promise to reverse the fateful PACCAR ruling, and its Litigation Funding Agreements (Enforceability) Bill is journeying through parliament very smoothly. From the funders’ perspective, the bill is not entirely perfect. Behind closed doors, a few eyebrows were raised at its original wording, which defined litigation funding agreements (LFAs) more narrowly than expected. This has now been partly addressed by some minor amendments at grand committee; and we may see further changes to ensure that all types of litigation finance arrangements are fully in scope. But there is no doubt that, overall, the bill is a hugely positive development for the industry.

Then we have the other big news that the Civil Justice Council is carrying out a review of litigation funding, which will set out clear recommendations for change. Should funders be worried? That will, of course, depend on what changes the review comes up with.

One immediately striking aspect of the CJC review is its no-nonsense timescale, with an interim report due this summer, followed by a full report by summer 2025. How will it achieve this? Perhaps because it will not be starting from scratch. It is surely no coincidence that Mrs Justice Cockerill, a member of the CJC’s core working group, is also heavily involved in a research project on litigation funding for the European Law Institute (ELI) which is well under way. That project is developing a set of principles to balance the availability of funding with ‘the interests of claimants and defendants’ and ‘a healthy litigation market’. It will clearly be a useful starting point for the CJC’s review, which is all about making civil justice ‘more accessible, fair and efficient’.

The most obvious question that the CJC will be addressing head-on is whether litigation funding should be regulated – and if so, how and by whom. It is notable that one of the six initial core members of the CJC’s working group is a representative from the Financial Conduct Authority, director of consumer investments Lucy Castledine. Is this a clue that statutory regulation is on the cards? I suspect not. The FCA has so far shown no appetite for that onerous task. It seems more likely that the FCA will be attending meetings of the working group with a large bat in hand, ready to hit for six any suggestions that it becomes the industry regulator. Meanwhile, the question of statutory regulation has already been scrutinised by the ELI working group mentioned above. While its report is not yet public, I am given to understand that a draft version concludes that statutory regulation would not be the right approach. If so, this is likely to influence the CJC review.

So if not statutory regulation, what else? Presumably, the industry would be looking at some sort of beefed-up version of the self-regulation currently carried out by the Association of Litigation Funders. The ALF was set up in 2011 with a well-regarded code of conduct to which all members must adhere. The flaw, however, is that membership is voluntary, and just 16 funders have signed up. There is an argument that the very existence of the ALF code has a wider ‘umbrella effect’, with many solicitors insisting that any funder they use keeps to ALF standards. But if funders really are routinely complying with the ALF code in practice, why haven’t more of them signed up to the association? It will be interesting to see what the CJC recommends, but I doubt if it will be a simple continuation of the status quo.

As well as regulation, there are many other areas where the CJC review could have a huge impact. A key battleground will be whether funders’ fees should be capped. An attractively simple argument is floating around that funders’ fees should be subject to the same 50% cap as solicitors acting under a damages-based agreement. But funders will argue vociferously against capping their returns because they have no control over the real evil: legal costs. They will warn that such a cap could be easily exploited by defendants, who would be further incentivised to drive up the cost of litigation until a funder reaches its limit.

These are complex issues, but the signs are that the CJC review is well-equipped to handle them. It is particularly encouraging that it is already drawing together a broader consultation group to provide a forum for discussion and exchange of views. When the recommendations come, we can expect them to be considered, comprehensive and workable. And according to the CJC’s own timetable, it will not be too long to wait.

Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs