May you live in interesting times.
Members of the litigation funding community could be forgiven for thinking that they were the victims of the apocryphal Chinese curse.
For some time they have been beset by a series of ‘interesting’ events: the judgment of the Supreme Court in PACCAR, the Post Office Scandal (particularly the scrutiny following the release of ITV’s Mr Bates vs the Post Office), the failure of the Litigation Funding Agreements (Enforceability) Bill, among others – including the more prosaic, but probably more material impact of, rising interest rates on the litigation funding model.
None of these events have been of the litigation funders’ making. All of them have adversely impacted them.
The same can’t be said for all the ‘interesting’ events in the news though – some of them can only be described as self-inflicted.
Take for example the recent decision of the Financial Services Ombudsman (FOS) concerning Novitas Loans, a subsidiary of Close Brothers and, until it ceased lending in 2021, a leading consumer-focused litigation funder. Novitas has received a number of adverse FOS decisions in the past, normally focussed on a failure to undertake reasonable credit checks. By those standards, the findings of the FOS in favour of a complainant, identified simply as Mr A, are surprising.
Mr A was involved in a dispute with his ex-partner over their joint property. He sought, and obtained, a loan from Novitas to pay his legal fees. The loan was charged against his share of the joint property. His complaint stemmed from the fact that, at the date he sought the loan, Novitas had already extended a loan to his ex-partner, which was secured against her share of the joint property.
While finding that Novitas’ pre-loan credit checks were neither reasonable nor proportionate, the FOS also found that Novitas had “created a situation where Novitas had two or more competing interests and there was at least the potential that serving one of those interests could damage or harm the other interest”. The FOS directed Novitas to refund all interest and charges and reduce the capital sum repayable by half as a result of the conflict of interest.
The drama unfolding around the Mastercard Interchange Fee collective action settlement is of a similar theme, if on a larger scale. The claim, brought by a former Financial Service Ombudsman, Walter Merricks, was at one point valued at £19 billion. However, it settled in December 2024 for approximately £200 million. The settlement is a fraction of the claimed sum and provoked an immediate, and very public, war of words between Mr Merricks and his litigation funder, Innsworth.
This is not the first dispute between a litigant and a funder. Indeed, there have already been a number that have crystallised into court proceedings. In one sense, the existence of these disputes points to the legitimacy of the litigation funding industry and, in particular, its central tenet that litigants retain control over funded litigation.
At the centre of these types of disputes is always whether the litigant owes money to the funder for the manner in which the litigant exercised their control. The litigant may end up owing money, but that does not take away from the fact that, ultimately, they still retained and exercised that control.
Documents lodged with the Competition Appeals Tribunal show that Innsworth’s expected return from its £40 million investment in the claim was double the amount of the settlement. The share of the settlement that Innsworth actually receives remains to be seen (as an opt-out collective action, the distribution of the settlement must be sanctioned by the Tribunal and will therefore be public). Clearly, the discrepancy will be large, fuelling Innsworth’s motivation to dispute Mr Merrick’s conduct. However, the lodged documents do reveal an intriguing angle at play in the quarrel.
The settlement amount also includes an additional £10 million fund available to Mr Merricks to pay his legal fees for defending Innsworth’s claims. In agreeing a ‘fighting fund’ as part of the settlement, Mr Merricks and Mastercard have not done anything illegitimate, but it is unlikely to attract good PR.
For supporters of litigation funding, the airing of these developments cannot come at a worse time, as the Civil Justice Council undertakes its review of litigation funding. These incidents undoubtedly provide more ammunition for those clamouring for mandatory regulation of litigation funding. Whether the review recommends mandatory regulation, and, if so, what form that regulation will takes, remains to be seen.
For further information on litigation funding, please view our dedicated page or speak to Partner Ben Pilbrow.