The drive to regulate litigation funding is gathering pace on both sides of the Atlantic. What does this spell for the future of the $15bn funding industry? Smart money suggests that the industry will continue to thrive and mature.
US regulatory landscape
In the US, on 4 October 2024, representatives Darrell Issa (R-California) and Scott Fitzgerald (R-Wisconsin) introduced HR 9922, the Litigation Transparency Act of 2024. If enacted, the act would require the disclosure of third-party litigation funding (TPLF) in federal civil lawsuits. At state level, Wisconsin adopted rules requiring disclosure of TPLF in 2018 – the first to do so. Montana followed suit in 2023. In 2024, a further three US states adopted rules governing TPLF – Indiana, Louisiana and West Virginia.
Another six US states have proposed legislation governing the practice – Arizona, Georgia, Maryland, New Hampshire, Ohio and Oklahoma.
Maryland draft bill SB 985 would introduce regulations not only on funding – including disclosure obligations – but also prohibitions on payments for the referral of clients. This presumably applies to leads generators and book-builders, and appears designed to stifle the funding of class actions.
Others, such as Arizona SB 1215, place limits on the amounts that funders can earn; in that case, no more than the sums recovered by the consumer.
European perspective
In Europe, the picture is similar. Both national and EU regulators have the industry firmly in their sights. And although there is, as yet, no consensus on the best way to regulate it – whether prescriptive or light-touch – there is a growing belief that some form of regulation is appropriate. The EU Parliament passed resolution 2020/2130(INL) in September 2022. This urges the European Commission to issue a directive that would introduce an authorisation, supervision and complaints system, as well as regulations governing disclosure and control of litigation finance.
The UK is also expected to revisit draft legislation advanced under the previous government to address some of the uncertainty created by the UK Supreme Court after the PACCAR decision. Recommendations for broader reforms can also be expected upon delivery of the final report on litigation funding by the Civil Justice Council following public consultation.
The direction of traffic is clear. The industry will still face calls for regulation. A spotlight will continue to shine on the nascent industry’s problems – whether it is Burford facing negative research attacks about its fair value accounting, or Elliott-backed Innsworth suing the lead plaintiff in the Mastercard litigation.
Why the hate?
So why all the hate for an industry that prides itself on expanding the reach of justice? One interesting fact is that the industry faces resistance across the political spectrum, a relative rarity in today’s political climate (Georgia Senate Bill 69 was sponsored by 27 senators and was recently approved by a vote of 52-0). Politicians, on both left and right, worry that funders take advantage of the legal system – either at the expense of consumers, or at the expense of legitimate corporate interests.
It is no small irony that some of the loudest corporate voices lobbying for regulation of litigation funding are the same large corporate interests that decry excessive regulation of their own industries, whether in media, technology, manufacturing, insurance or financial services.
The current regulatory debate is focused on the appropriate level of disclosure required of funding arrangements, and on the limitations on the control exercised by, and remuneration of, litigation funders, particularly in consumer cases. That focus is unlikely to change.
And, of course, certain aspects of the professional funding industry are already regulated. So, for instance, any funder that raises capital from investors in a structured investment vehicle is likely already complying with a host of regulations relating to the marketing of securities or interests in unregistered funds.
What may change is that legal assets may come to be treated in a similar way to securities, such that dealing in such assets, or providing investment advice in relation thereto, may also become regulated activity. This is not necessarily a bad thing, in theory at least, but it will increase the barriers to entering the industry, and will thus favour incumbent players, and those with the resources to meet the financial burden associated with regulation.
How will the sector evolve?
The smart bet is that the industry will survive, despite short- and medium-term challenges. Not because legislators will suddenly accept the benefits of litigation finance in promoting access to justice and filling the gap in legal aid budgets; rather, because powerful corporate interests are warming to the benefits of litigation finance as a risk management tool, whether as a means to improve working capital, recognise assets on the balance sheet, or reduce overall borrowing rates (e.g. by using litigation assets as additional collateral).
In that sense, there is some analogy with the theory that the crypto industry will also survive now that institutional capital has poured into the asset class. The litigation finance sector will probably continue to divide, though – between funders that either primarily serve consumer or corporate interests. The latter will eventually be absorbed by larger financial institutions as their products become more mainstream and commoditised. The former are more likely to remain independent and will continue to come under attack from corporate defendants whose interests their lawsuits target.
The question remains whether the zeal to regulate will threaten the industry’s ability to deliver on its core social promise – to harness private capital to improve access to justice and corporate accountability.
Christopher Garvey, founder of Sachenga & Co, London, has an institutional background in law and private equity
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