The reform of litigation funding edges closer as CJC report is published

On 31 October 2024, the Civil Justice Council (CJC) published its much-anticipated interim report on its ‘Review of Litigation Funding’.  The CJC report is a pre-cursor to a final report which is due in September 2025, and invites all parties impacted by the litigation funding sector to provide responses to a series of questions concerning third party litigation funding (TPF).

The TPF sector was sent into turmoil in July 2023 following a decision of the Supreme Court in R (PACCAR) v Competition Appeal Tribunal (PACCAR), which called into question the validity of a number of TPF agreements. The PACCAR decision ruled that such agreements are ‘damages based agreements’ (DBAs) and they must therefore comply with the applicable regulations governing DBAs (DBA Regulations), which TPFs generally do not. This decision led to existing funding arrangements having to be restructured, and has arguably slowed, if not stopped entirely, the growth of the market.  In Spring 2024, consequent on the PACCAR decision, the Lord Chancellor called upon the CJC to carry out a review of litigation funding generally and to report on a number of areas associated with the funding of civil litigation. Although the decision in PACCAR may have helped to pave the way for a review of litigation funding generally, such a review was clearly much needed as TPF continues to grow and evolve. 

What is litigation funding?

Litigation funding refers to the various ways in which claimants and defendants to proceedings before the civil courts (including tribunals) are able to pay for the cost of those proceedings. Third party litigation funding is one way in which parties to proceedings can fund their costs. Although TPF has been around for decades, it is only in the last decade that the TPF market has began to fully develop, with the TPF industry in England and Wales now the second largest such market in the world.  As the CJC report recognises, UK third party funder’s assets have increased from £198 million in 2011/2012 to £2.2 billion in 2021, a ten-fold increase.

Litigation funding has never been more under the spotlight than it is now. This comes on the back of the recent Post Office scandal. As has been widely publicised, the group litigation pursued by 555 sub-postmasters against the Post Office resulted in a settlement of £57.75 million being reached. The claim was funded by TPF. However, of the £57.75 million settlement, £45 million was paid to the third party funder in order to repay the funding provided, together with the funder’s return, plus other fees which were payable to the lawyers working on the case. This left just £12m for distribution between the claimants. Whichever side of the fence you sit on, the outcome of this litigation was a function of the current system. On the one hand, the outcome looks unfair on the claimants, who in practice each received only c£20,000 of the c£99,000 damages payment. On the other hand, the downside risk for the funders and lawyers who worked on the claim was significant, and without those parties being prepared to take on that risk, the claims would never have been pursued in the first place. 

What issues is the CJC focussed on?

The CJC report, being an interim report, identifies many of the concerns and issues with the current system of funding litigation in the UK. The aim of the report is to set the scene for launching a consultation on these issues, rather than providing any outcomes at this stage. However, if one reads between the lines, the CJC report does give an indication as to the Government’s direction of travel in certain areas.

One of those areas is regulation of the TPF market. In 2011, at a time when the TPF market in the UK was starting to develop, the Association of Litigation Funders (ALF) was formed and a voluntary code of conduct was created. The ALF code, amongst other things, imposes obligations on funders concerning matters such as the maintenance of confidentiality, the maintenance of capital adequacy to a sufficient level, the achieving of settlements and the termination of funding agreements. 

However, both membership of the ALF and compliance with its code of conduct are voluntary. This adoption of a self-regulatory regime is unique to the UK; other jurisdictions either have no regulatory regime or make it subject to formal statutory regulation. The CJC report has rightly observed the flaws with such a self-regulatory regime, and repeatedly makes the point that an estimated 44 funders operate in England and Wales, yet only 16 are members of the ALF. The writer of this article would subjectively observe that this is a highly conservative estimate of the number of funders operating in the market; whilst this may be an accurate number of ‘publicised’ TPF’s, with the number of ‘special situations’ funds, private equity houses, family offices etc operating in the sector, the accurate number of funders in the market could easily be double this reported figure. If only 16 are complying with the ALF’s code of conduct, that is a very small number in percentage terms.  Whilst the CJC does not, of course, nail its colours to the mast, the multiple pages of commentary on the inadequacies of a self-regulatory regime put forward a compelling case for some form of mandatory regulation.  

Another area of focus of the CJC is the relationship between litigation costs and funding. The CJC report recognises that any reform of litigation funding may have an impact on litigation cost and vice versa, and analyses issues such as costs capping, the impact of litigation funding on settlements and the recoverability of litigation funding costs.  The report analyses how both conditional fee agreements (CFAs) and DBAs operate, and recognises that the DBA Regulations are not fit for purpose. As such, the point is made that the impact of the decision in PACCAR has been to bring many TPF agreements within the scope of a regime which is itself inadequate. 

The new Labour Government has confirmed that the former Government’s planned ‘Litigation Funding Agreements (Enforceability) Bill 2024’, which was intended to clarify that TPF agreements do not fall within the scope of the DBA Regulations (which would effectively overturn the PACCAR decision), will not now be implemented.  Although the CJC’s final report in itself may not solve the problems created by PACCAR nor the DBA Regulations, it would be disappointing if the CJC did not take this opportunity to provide some much-needed clarity in these areas, even if further legislation was to follow. 

What is emphasised throughout the report is the diverse nature of the TPF market and the claims that TPF is looking to fund. The final section of the CJC report analyses the various types of TPF that is currently available, including traditional funding models, CFAs and DBAs, crowdfunding, ‘pure funding’, trade union funding, ATE insurance and portfolio funding, and the CJC recognise the complexities involved in adopting a ‘one size fits all’ approach to funding. 

Next Steps

The CJC now request responses to its consultation questions by 31 January 2025. The questions posed include the following:

• Whether TPF should be regulated, and if so, how and by whom.
• Whether the same regulatory mechanism should apply to all types of litigation and arbitration, both in terms of claim size and claim type.
• Whether third party funders should remain exposed to paying adverse costs in relation to proceedings they have funded.
• Whether the costs of litigation funding should be recoverable as a litigation cost in court proceedings.
• Whether the returns of third party funders should be subject to controls, such as a cap on returns.
• Whether there should be separate regulatory regimes governing CFAs and DBAs.

The full CJC report and the consultation questions, together with information on how and where to submit responses to the consultation questions, can be found here.

Charles Russell Speechlys works with litigation funders and other market participants in advising on and structuring a variety of litigation funding facilities. For further information, please contact James Walton or your usual contact.