UK plc stands to suffer ‘enormous damage’ from an ever-expanding class action regime, says the Adam Smith Institute. Counterintuitively, the free-market thinktank wants more regulation – and legal aid
When the doyen of free-market thinktanks calls for extending regulatory reach and replacing private sector finance with government funding, something is clearly wrong. According to the Adam Smith Institute, what is wrong is the dramatic growth in the use of third-party-funded class actions in England and Wales. In a report published this week, it calls for ‘decisive action’ to avoid the phenomenon undermining business confidence in the UK.
The report, Judge Dread, appeared in the week the UK’s largest ever group action, seeking compensation for the 2015 Mariana Dam collapse in Brazil, opened in London’s High Court. Meanwhile, according to the report, in 2023 the sums claimed in class actions added up to £123.17bn, more than twice the UK’s defence budget for that year. Since 2015, actions have been filed relating to 540 million class members, eight for every person in the UK.
Who benefits from this booming business? Not individual claimants but ‘claimant-focused law firms and litigation funders’, the report alleges. And the fact that funders support only 2% to 4% of the cases pitched to them gives the lie to assertions that the sector is about access to justice, it says.
If the status quo continues, report author Sam Bidwell concludes: ‘The UK stands to suffer enormous reputational and material damage from an ever-expanding class action regime. Its rapid expansion over the past decade is only damaging our ability to attract investment from big, mobile international companies, without meaningfully expanding access to justice for ordinary people.’
Proposals for ‘decisive action’ to curb the worst excesses of class action culture include four sets of recommendations. The list is topped by a call for litigation funding to be brought under the Financial Conduct Authority’s regulation regime to ensure consistency in oversight. Explaining this counterintuitive stance, the report continues: ‘The issue is not, per se, a lack of regulation, but the lack of consistently applied and enforced regulatory oversight – which even ardent supporters of deregulation should oppose.
‘Even the most laissez-faire state requires the consistent application of rules in like-for-like cases.’
'Responsible businesses should have no cause for concern from litigation funding. The sector plays a small, but important role in providing access to justice'
Neil Purslow, International Legal Finance Association
Another apparently counter-intuitive recommendation is for the restoration ‘where possible’ of legal aid, which it describes as a ‘preferable alternative’ to commercially driven third-party funding: ‘While legal aid should be sufficiently restrained as to prevent abuse, a well-delivered system of legal aid can help to ensure expanded access to justice on reasonable terms.’
Other recommendations include calls for a blanket requirement to disclose third-party funding; the consistent application of anti-money laundering regulations; and for businesses to be protected from class actions while regulatory investigations are ongoing. Meanwhile, businesses should have the chance to offer their own compensation packages ‘without the immediate threat of judicial interference’.
Predictably, the litigation funding industry has hit back at the institute’s claim that it is acting to the detriment of claimants. Neil Purslow, chairman of the International Legal Finance Association, responded: ‘Responsible businesses should have no cause for concern from litigation funding. The sector plays a small, but important role in providing access to justice... The cases funders back have several common features: corporate wrongdoing, a clear and compelling case to answer, and claimants who could not otherwise afford their day in court.
‘As this report recognises, funders take on just a fraction of cases after careful consideration... So it’s contradictory and disingenuous in the extreme to simultaneously argue funders take on too few cases while also causing a proliferation in litigation.’
Whether the recommendations gain any political traction remains to be seen. On the day of publication, the Conservative government’s last lord chancellor, Alex Chalk, lambasted the current government for failing to legislate to clear up the uncertainty following the Supreme Court’s ruling in PACCAR. ‘Litigation funding is a force for good that is backing attempts to secure people’s basic rights,’ Chalk wrote in The Times. ‘The UK’s legal services market, valued at £41 billion in 2021 and expected to grow to £50 billion this year, relies on litigation funding to maintain its competitive edge.’
The government seems content to wait for the review of the sector by the Civil Justice Council – the first report of which was once scheduled for summer 2024 – before deciding what, if any, action to take.
The great Adam Smith himself once said that, if justice is removed, ‘the great, the immense fabric of human society… must in a moment crumble into atoms’. All sides presumably agree on that.
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