Regulation of third party litigation funding in England and Wales

Litigation funding has provided investors with a new opportunity which allows them to hedge market risk, as investments into litigation finance do not tend to follow general market trends. Market participants include specialist litigation funders as well as major global financial institutions, demonstrating that this type of funding is seen as a lucrative emerging industry.

What is third party litigation funding?

Third party funding is the funding of legal proceedings by an entity that is not involved in the dispute, typically in return for a share of the damages received or the settlement sum.

The amount of assets under management by the 16 main third party funders that operate in the UK is now over £1.5 billion based on figures which are publicly available, although the actual amount is likely to be much higher. This figure has grown by 743% from £180 million in 2009, the year of Lord Justice Jackson's review of civil litigation costs.

A wide range of disputes can be attractive to funders including share disputes, contractual disputes and enforcement of debt actions; and third party funding can be used for either court or arbitral decisions.

How is third party litigation funding regulated in the UK?

At present, there is no legislation regulating third party funding in the UK.

As of 2017, the government has no plans to formally regulate third party funders as the market "remains in a relatively early stage in its development". The government has, however, said that it is ready to investigate matters further should the need arise.

Third party funding in England and Wales is self-regulated by the Association of Litigation Funders (ALF). The ALF is a private company limited by guarantee, owned and directed by its member firms.

A voluntary code of conduct for litigation funders was first published in November 2011. It was developed by a Ministry of Justice working group on third party funding, which was set up in response to a recommendation by leading judge Lord Justice Jackson in his comprehensive review of civil litigation costs.

Although voluntary, compliance with the code is mandatory for funders which are seeking to become members of the ALF. Funders that agree to abide by the code are prevented from attempting to influence the litigation, and must agree to pay all debts when they become "due and payable". They must also ensure that they have enough capital to cover all the arrangements on their books for a minimum period of 36 months.

In addition, the code prevents funders from terminating a funding agreement "without good reason. Funders must also ensure that the party to the dispute "receives independent advice" on the terms of the funding agreement, usually from the party's own solicitor.

ALF members which fail to meet the requirements of the code may be subject to a fine of up to £500 and/or termination of their membership. However, termination of membership does not prohibit a funder from continuing to fund claims, and many active funders are not members of the ALF at all.

Professional third party funders are often staffed with solicitors which are regulated by the Solicitors Regulation Authority (SRA). This means that they must follow the SRA Handbook which is made up of two parts: the SRA principles, which are mandatory and cover all areas of legal practice; and the SRA Code of Conduct.

As part of these requirements, solicitors have an obligation to advise litigants on funding options including insurance and third party funding. Failure to do so can result in sanction by the SRA, and potential liability for professional negligence.

Ben Wells is a civil litigation expert at Pinsent Masons, the law firm behind Out-Law.com.