It is difficult to judge the age of the litigation funding industry in the UK, both because the confidentiality of funding means that it is hard to identify the funded claims, and because of the conceptual issue of how many funded claims it takes to establish an industry.
It is easier to infer the genesis of the litigation funding industry through external, objective data points, such as the dates of key judgments providing judicial sanction for funding, or the incorporation dates of the established funders. The first category points to a date of establishment in the late 1990s. The second category suggests the late 2000s.
Whether the industry is in its teens or in its twenties, the fact remains that its life has been one largely free of oversight. In his final report on civil litigation costs in 2009, Sir Rupert Jackson recommended that the litigation funding industry self-regulate. His comments prompted the establishment of the Association of Litigation Funders (ALF). The ALF’s initial purpose was to assist in the establishment of a code of conduct for funders, which could act as a safe harbour for funders attempting to chart safe passage through the turbulent waters of maintenance and champerty.
The Code of Conduct for Litigation Funders (the “Code”) was published by the Civil Justice Council (CJC) in November 2011. Following its publication, the ALF has sought to become the independent body that represents the interests of third-party litigation funders in England and Wales, and regulates the enforcement of the Code amongst its membership. It has been joined by an international equivalent, the International Legal Finance Association, which is headquartered in the USA.
However, this picture of self-regulation is perhaps misleading. Data collected in 2021 estimates that 44 litigation funders were operating in England and Wales, of whom only 16 were members of the ALF.
Why are so few litigation funders members of the ALF, is there a material difference between the behaviour of members and non-members and does the state of affairs mean that more oversight is now needed?
The Code
The Code sets out the standards that ALF members must meet. The core aspects of the Code are:
Capital adequacy – funders must maintain adequate financial resources to meet their obligations and fund the disputes they have agreed to fund.
Termination and approval of settlements – funders must behave reasonably and may only withdraw from funding in specific circumstances. Where there is a dispute about termination or settlement, a binding opinion must be obtained from an independent KC.
Control – funders are prevented from exercising control of litigation or settlement negotiations, and from causing the litigant’s lawyer to act in breach of their professional duties, beyond requiring updates on process of proceedings.
Is self-regulation sufficient?
At present, the CJC is conducting a review of litigation funding. Its interim report was published in October 2024, with the full report due in summer 2025. One of the central issues of the review is whether litigation funding should be regulated, with the terms of the interim report suggesting a final outcome of mandatory regulation of litigation funders. The CJC’s review will also look at the role of the courts in managing funded litigation, including the disclosure requirements within funding arrangements and the influence of funders on litigation management. The consultation is set to run until the end of March 2025.
Is the outcome likely to be a recommendation for a change from self-regulation to mandatory regulation, and, if so, why?
Part of the reason must be the increasing popularity of litigation funding. When Sir Rupert Jackson recommended self-regulation, the industry was still small and his suggestion was to guide and protect the industry. Two of the three core aspects of the code focus on protecting funders from committing champerty as a result. The code takes the view that it is the users and opponents of litigation funding that need protection from a much larger and more confident litigation funding industry.
But part of the reason must be the actions of some litigation funders.
Questions have been raised as to the efficiency of the Code. More recently, the High Court was asked to assess a dispute resolution clause in a Litigation Funding Agreement (“LFA”) to determine whether it was an arbitration clause (Bugsby Property LLC, Bugsby Investments Limited v Omni Bridgeway (Fund 5) Cayman Invt. Limited, Therium Litigation Finance A IC [2024] EWHC 2986 (Comm).
In this case, the court held that the clause was not an arbitration clause and, given there was already an London Court of International Arbitration (LCIA) arbitration underway, the court refused to allow a second arbitration to proceed. In doing so, the court addressed the key clauses ALF members often adopt in LFAs to counter the issues presented by complying with the Code. First and foremost, this decision is a reminder of the importance of drafting arbitration agreements precisely and clearly. However, the case also acts as an insight into how the courts may interpret LFAs, in particular, the clauses that come into issue when a disagreement arises between party and funder.
Not all calls are for mandatory regulation though. There is support in favour of continued self-regulation too. The European Law Institute (ELI) published a report in October 2024, which makes a case for a ‘light touch’ approach when it comes to the regulation of litigation funders. Amongst other factors, the ELI’s reasoning rests on the importance of the role of litigation funding in enabling access to justice. The report goes as far as to suggest that onerous regulation will restrict funders’ ability to provide funding, which could impact small businesses and prevent them from bringing legal claims against the larger conglomerates, ultimately hindering companies and the rule of law in the UK.
This article was co-authored by Trainee Megan McNicoll.