In depth: Litigation funding - does the cap fit?

Submissions to the extended Civil Justice Council review of litigation funding have generally come out strongly in favour of formal regulation of the sector.

With one notable exception. The Law Society has performed a U-turn on the issue – though hardly an abrupt one.

Back in 2010, Chancery Lane called for statutory regulation, but now contends that self-policing can be made to work better. In its response to the consultation, which closed on Monday, the Society calls for self-regulation to be strengthened, noting that just a third of litigation funders are signed up to their eponymous association.

The Society sees merit in funders being compelled to join an umbrella organisation such as the Association of Litigation Funders, ‘with tighter principles, codes of conduct and complaints procedures’. Sanctions for non-compliance with the code should be increased, it adds, noting that the current ALF limit of £500 ‘seems a token amount with no real punitive consequence’.

The Society does not emphatically dismiss the prospect of statutory regulation, most likely by the Financial Conduct Authority, but argues that ‘there seems to be much that could be done at a self-regulatory level that would deliver the same outcomes, but with less expense and duplication’.

Oversight regulator the Legal Services Board, by contrast, is unequivocal. Regulation ‘is necessary to protect consumers from harm and to further the public interest’.

The watchdog states that action is required from both financial and legal services frontline regulators to adequately address the nature and scale of the risks to consumers which, to a large extent, emerge from the third-party funding entities themselves.

‘Financial services regulation needs to be introduced to the litigation funding sector, replacing the existing self-regulation model and extending their current duties. Legal services regulators also have an important role to play in protecting litigants through their existing powers, such as ensuring law firms and legal professionals engaging with third-party litigation funding comply with their obligations.’

'Without a cap on returns, the risk is that litigation could be brought primarily for the profit of the funder'

Association of Costs Lawyers

The CJC review is looking at a broad range of issues, including whether funders’ returns should be capped; what role the courts should play in controlling funded litigation; and the extent to which the presence of funding should be disclosed. It is expected to report this summer.

The LSB’s response notes that, though the uptake of litigation funding has increased ‘dramatically’ over the past decade, it contributes to access to justice only in a minority of cases and ‘in most instances, third-party litigation funding cases are of more financial benefit to the funder than the claimant(s)’.

Another LSB concern is the imbalance in the relationship between the funder and funded, which ‘could allow funders to exert influence and control over litigation with their own best interests in mind, which may not align with advancing access to justice’.

The Association of Costs Lawyers, meanwhile, concludes that third-party funding is of net benefit to access to justice – but agrees formal regulation is needed. This should include a cap on the funder’s return in the vast majority of cases, the association states. ‘Without a cap on returns, the risk is that litigation could be brought primarily for the profit of the funder. At the same time, the ACL recognises that funders take on a significant amount

of risk and any cap should reflect it.’

The Law Society concurs, but only partially: ‘Imposing caps on a funder’s return should be treated with caution, but we see merit in allowing the courts to impose such a cap on a case-by-case basis, subject to an emphasis on tightly controlled case management and proportionality of costs.’

On the issue of whether the funding agreement should be disclosed to the defendant, the ACL considers this unnecessary, unless the type of funding means the opposing party could have an additional liability for costs.

And what of reversing PACCAR, the 2023 judgment which inflicted a grievous wound on the industry, placing the enforceability of litigation funding agreements in doubt? This is outside the remit of the CJC consultation, but the Law Society observes nevertheless that fresh legislation need not be rushed. Since PACCAR, funders have largely swapped to a funding model based solely on a multiple of the sum invested, in a bid to avoid being considered a damages-based agreement.

‘We would welcome steps that increase certainty for both consumers and funders,’ says the Society. ‘However, anecdotally we are aware that many funding agreements have inevitably moved away from DBA-style caps towards multiples of investment.

‘If funding agreements are being amended to take account of PACCAR, and if access to justice is not being impeded, we would view legislation to address PACCAR as low priority.’