The European Union is planning a clampdown on the worst elements of litigation funding, with recommendations for a new system of regulation.

In the Voss Report published over the summer, it was concluded that ‘soft’ law approaches such as those taken in the UK – where regulation is voluntary and self-policed – have not proved effective in properly managing the sector.

The report said that funders are ‘regularly demanding excessive returns’, leaving claimants in some cases with nothing to show from their case, with counter-arguments about increasing access to justice not supported by experience.

The European Parliament, which has approved the report, is concerned that jurisdictions on the continent will experience the same problems as in Australia, the USA or the UK - namely what the report describes as ‘actors seeking profit maximisation at the expense of claimants’.

The report, written by German MEP Axel Voss, said: ‘Only strong legal safeguards combined with sound knowledge of the use of [third-party litigation funding] will prevent us from scenarios that occurred in other parts of the world.

‘The European Union should use this matter to demonstrate to its citizens that the European Institutions are not only able to find solutions after a crisis has done already severe damage but that they can also act pre-emptively, at an early stage to stop the further erosion of our justice system and to guarantee adequate compensation and protection for our citizens.’

Recommendations include:

  • An authorisation system managed by each member state;
  • Financial adequacy requirements and an obligation to pay adverse costs;
  • Disclosure of any litigation funding agreement towards the court and all parties;
  • A cap on fees to guarantee fair and proportionate returns for claimants.

The report acknowledges that supporters of litigation funding argue that it improves access to justice and discourages wrongdoing by defendants. They say that it serves as a vehicle for the pursuit of low-value claims which would not be pursued otherwise and stops defendants from defeating cases through superior economic power.

But the report suggests this argument is not borne out by experience, and instead third party litigation funding is a ‘profit-making enterprise, in which justice for the claimant may or may not be a by-product’.

In Europe, the report states, rates of return for litigation funders may be up to 300%, and there are various examples of funders taking control of litigation to push for a settlement to increase their returns, irrespective of the fairness of the financial outcome for the claimant.

‘In such cases, a losing defendant effectively transfers wealth to an unharmed investor, while claimants who have suffered a harm risk receiving little or no redress.’

The EU initiative contrasts sharply with the situation in the UK, where the litigation funding industry has been allowed to grow with few constraints from legislators. As the Voss report points out, the only self-regulatory code in Europe is that of the Association of Litigation Funders - but just 12 of the 80 litigation funders operating across the continent are members.

The International Legal Finance Association, a global membership group for litigation funders, said it will work with the EU and member states to ensure policy is ‘informed by current and accurate data on the litigation funding industry in Europe and its positive impacts on justice systems’.

Executive director Gary Barnett said: ‘Legal finance plays a critical role for EU citizens and businesses seeking redress provided to them by law, and protecting the effective administration of justice.’

 

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