Review of litigation funding in England leads to consultation on future regulation

The consultation has been launched at the same time as the release of an interim report (112-page PDF/774KB) on England and Wales’ litigation funding sector by the Civil Justice Council’s (CJC) litigation funding working group. The report discusses how acceptance of TPF has grown over time, but also highlights some key areas of concern about funding. In particular, the report focuses heavily on the regulation of TPF.

Although the report does not make recommendations, it provides an overview of the current TPF market and the necessary background and context for the consultation questions, such as which regulatory approach the government should take, whether funders’ returns should be capped, and whether funding arrangements should be disclosed to tribunals and opponents. The consultation will run until Friday 31 January 2025 and inform the working group’s final report, which is expected in summer 2025 and will make recommendations to the government.

Emilie Jones, a litigation expert at Pinsent Masons, said that the interim report is an important step towards a wholesale consideration of the litigation funding landscape in England and Wales by the government. “It seems clear that the CJC’s final report next summer will make recommendations about the regulation of TPF in England and Wales, given the level of focus on the topic of regulation in this interim report,” she said.

According to the CJC’s interim report, TPF is currently self-regulated, under a voluntary Code of Conduct for Litigation Funders (ALF code) administered by the Association of Litigation Funders of England & Wales (ALF). In addition, some individuals working within funders will be regulated by the Solicitors Regulation Authority (SRA) or Bar Standards Board (BSB), while some funders are also regulated by the Financial Conduct Authority (FCA) due to the manner in which they manage their investors’ funds.

While all ALF members must sign up to the ALF code, not all funders active in the market are ALF members. The report cites 2021 data that an estimated 44 funders operate in England and Wales, of which only 16 are members of the ALF. Among the ALF members, 8 are also members of the International Litigation Funders Association (ILFA), a representative body. Some recent research led by Professor Rachael Mulheron of Queen Mary University of London for the Legal Services Board reported feedback from the legal industry that some non-ALF funders also apply the ALF code as they view it as best practice. However, the report notes that this was not supported by evidence from non-ALF funders and that it is not clear how many such funders follow this code.

The report points out that the ALF code is limited in scope, only imposing obligations on funders concerning certain issues. The main issues covered include the maintenance of confidentiality, the provision of independent advice to funded parties, the maintenance of lawyers’ professional duties, the avoidance of funder control over the litigation, the maintenance of capital adequacy, the achieving of settlements, and the termination of funding agreements. 

The report notes that questions may be raised concerning the ALF code. In particular, the report notes that the code does not specify the purpose for which funding may legitimately be provided – for example, it does not stipulate that funding may only be provided where to do so will facilitate access to justice or equality of arms.

The current self-regulatory approach was endorsed by the Jackson Costs Review of 2009 (Jackson Review), but this recommended that if and when the TPF market expanded, the question of statutory regulation should be revisited. The CJC interim report has identified a tenfold increase in the value of the UK third party funder’s assets since 2012, which Jones commented makes consideration of statutory regulation timely.

The report sets out the range of different approaches to regulation, from formal regulation and self-regulation, to economic instruments such as civil law regimes, and information or education campaigns. It outlines the approaches of different jurisdictions to the regulation of TPF, noting that a spectrum of different approaches is taken to funding and its regulation across jurisdictions such as Australia, Canada, Singapore, Hong Kong, European jurisdictions and US States. 

The consultation contains a number of questions about the appropriate approach to regulation of TPF in England and Wales. These address whether the current approach of self-regulation is sufficient; the advantages and disadvantages of different regulatory approaches or tools, in terms of addressing any risks or harms identified; and whether all types of litigation and arbitration should be subject to the same regulatory approach.

“The controversial questions of whether funders’ fees should be capped, and whether funding arrangements should generally be disclosable, are also likely to feature in the final report,” said Jones.

The report expressly asks for views on whether funders’ returns should be subject to a cap. One consideration also raised, in the course of the report’s review of funding costs, is the situation where the funded claimant’s recoveries in a particular claim are so low that, unless the funder is willing to negotiate on its fee, the damages awarded to the claimant would be exhausted by the funding costs. The report further raises the potential impact of situations where damages become squeezed on achieving settlement. For example, to what extent is a funder forced to reduce its return in order to encourage a funded client to accept a settlement offer?

On disclosure of funding arrangements, the report notes that such arrangements are not generally disclosable in England and Wales, although the Competition Appeal Tribunal (CAT) does generally scrutinise them as part of its consideration of whether to grant a collective proceedings order (CPO). The consultation includes a specific question about the extent to which disclosure should take place and its likely impact.

“The outcome of the CJC’s consideration of the topics raised in this interim report and consultation remains to be seen, and it does seem likely that the working group will be slow to recommend formal regulation if and to the extent that this is not considered necessary to address harms or risks experienced in the market,” said Jones.  “It is apparent from the interim report that the CJC is looking to reach views on the basis of empirical evidence.  As a result, a strong and diverse set of responses to the consultation will be important to produce the best outcome.”

She added that this consultation is significant to those interested in TPF, including funders, funded or potentially funded parties and their legal representatives, and organisations which are facing or may face funded claims. This is particularly because the UK government has said that it will not, until the CJC has made its recommendations, introduce legislation to address the effects of a Supreme Court decision on TPF last year, known as PACCAR.

In PACCAR, the Supreme Court found that TPF arrangements which entitle the funder to a return calculated by reference to the damages awarded to the funded party are damages-based agreements (DBAs). This means that such TPF arrangements are completely impermissible in opt-out collective proceedings before the CAT, and they must comply with certain statutory requirements in other cases.

In response to the decision’s impact on the market, before the general election in July 2024 the last government had introduced a bill to reverse the PACCAR ruling, the Litigation Funding Agreements (Enforceability) Bill.  However, this fell with the general election announcement and has not been revived by the current government pending the outcome of the CJC’s review, despite the fact that the CJC’s work is not set to address the rights or wrongs of the PACCAR decision.

The CJC’s report and the related consultation also come shortly after a similar development in the EU. The European Law Institute (ELI) has recently published a set of principles on how TPF should be governed. According to Jones, the UK government is also likely to have regard to these principles when making decisions on this area in due course.