LSB calls for mandatory regulation of litigation funding in consumer claims

Litigation funding should be regulated by the Financial Conduct Authority in consumer claims, the Legal Services Board urged yesterday.

LSB director of regulation and policy Richard Orpin said that the oversight regulator is concerned about ‘poor practice’ in some law firms receiving funding, ‘particularly in the high-volume consumer complaints sector’. He said this had ‘brought with it an increased risk of harm to consumers.’

Speaking at a Civil Justice Council event held for its ongoing review of litigation funding, Orpin said: ‘We’re concerned that this pattern of behaviour puts the future of “no win, no fee” cases at risk, and undermines trust and confidence in that particular part of the sector. We’re concerned about poor standards of client care, conduct that puts short-term financial gain above the client's interests and duty to the court, and other evidence of poor practice by law firms in receipt of such funding, such as… failure to advise clients of their potential liability.

‘We’re also concerned about poor practice by some – admittedly, not all – litigation funders, such as exerting undue control over the litigation process, attempting to obtain excessively high returns, or failing to [meet] capital adequacy requirements, particularly where funders make… risky investments.’

Orpin said this required action from both the Solicitors Regulation Authority and from financial services regulators. He said the SRA needs to be ‘more pro-active and effective in ensuring that law firms in receipt of litigation funding, particularly in the high-volume consumer complaints sector, comply with their obligations’. Where firms do not comply, the SRA must ‘take prompt and effective action’ to protect consumers, and the LSB would ‘hold it to account’ for doing so.

Orpin added that ‘there is a case for bringing third-party litigation funding within the remit of the Financial Conduct Authority in future, to ensure that consumers are protected and do not suffer detriment as a result of poor practice. This would mean moving away from the current voluntary model of regulation towards a mandatory model.’

He argued that this would be neither anti-economic growth, nor anti-competitive. ‘It would help to support growth by providing a stable and predictable regulatory environment, and support competition too by providing a level playing field which doesn’t currently exist with the voluntary model, where not all litigation funders subscribe to membership,’ he said.

Asked if the LSB would also support mandatory regulation in cases outside the consumer arena, for example in commercial litigation, Orpin said the LSB’s ‘starting point’ was the ‘protection and promotion of consumer interests’, and he was ‘not well placed’ to comment on commercial claims.

Also speaking at the CJC event, Richard Blann, head of litigation and conduct investigations at Lloyds Banking Group, backed the LSB’s call for stronger regulation of litigation funding. Blann, who was speaking in a personal capacity and said he was also reflecting feedback from a broader community of in-house lawyers, said:

‘Litigation funding is not altruistic; you don’t get American hedge funds investing in the UK for the benefit of UK consumers… they want to make returns. There’s nothing wrong with that, but it’s important to recognise the realities. The lawyers want to secure an income stream… the claimant is the weakest party and within that dynamic, there is potential for consumer harm. This isn’t theoretical, we have seen real life examples of these risks.

‘[For example,] the consumer getting very little information on the terms of the funding. They are at the mercy of solicitors who have a financial interest in the litigation and may not negotiate very hard because they want an ongoing relationship with the funder, which is their meal ticket.’

He added: ‘The claimant may be exposed to adverse costs risks if things go wrong, and they do… Self-regulation is ineffective and inadequate. Not all funders are signed up to the Association of Litigation Funders and indeed… it has no teeth. What’s the consequence of breaching the code, you get thrown out, but you can continue doing the same thing.’

Responding from the floor, Adrian Chopin, managing director of Bench Walk Advisers, which operates in commercial claims, said the courts would find any agreement in which a funder exerted control to be champertous, rendering it unenforceable. In reality, he added, funders already expect to cover costs where no after-the-event insurance is in place; meanwhile introducing price caps in almost any market leads to a reduction in supply.

‘Is it not better that these claimants use funding and obtain some redress, albeit with high costs and other drawbacks, than they remain entirely unable to bring their claim?’ he asked.

Meanwhile Mr Justice Simon Picken, co-chair of the CJC's litigation funding working party, noted that the CJC’s terms of reference require it to look at the issue of regulation ‘broadly’.

He added: ‘In doing so, there are several conclusions we might reach. We might conclude that the position post-Paccar requires no legislation changes… We might conclude that third-party litigation should be viewed as a damages-based agreement but that the position should only apply to post-Paccar agreements, and that any agreements entered into pre-Paccar should not be understood to be damages-based agreements.

‘We might conclude that third party litigation funding ought not to be understood as a form of damages-based agreement; we might then conclude it should continue to be subject to self-regulation or that it needs to be subject to a form of statutory regulation.’

John Sorabji, co-chair of the working group, added that he hoped the group would be able to report on its recommendations by the ‘start’ of the summer.