We have previously asked whether the regulation of litigation funding was becoming an inevitability. The clamour for regulation continues and, with the Civil Justice Council (CJC) due to present the final report of its Review on Litigation Funding to the government shortly, the regulation of the litigation funding sector seems, more than ever, a foregone conclusion.
But if the CJC does recommend regulation, as seems inevitable, who will likely be responsible for it? Against a backdrop of significant civil service cuts and a Chancellor decrying the burden of regulation, none of the possible candidates for the job are likely to be keen to secure it. And what form will the regulation likely take?
In this two-part article series, we will look at the possible answers to these two questions. This article will focus on the former.
The options for regulator
The interim report of the CJC’s Review on Litigation Funding catalogues how regulation of the litigation funding industry was viewed historically in England and Wales.
Of particular note in relation to the likely identity of a regulator are the conclusions of (i) the CJC in its report on The Future Funding of Litigation – Alternative Funding Structures in 2007 and (ii) Sir Rupert Jackson in the final report of his Review on Civil Litigation Costs in 2009 (which was the last review in this country on the question of whether or not to regulate litigation funding).
Both the CJC and Sir Rupert proposed self-regulation but concluded that “if the use of third party funding expands, there may well be a need for full statutory regulation”. They differed in their suggested candidates for if and when regulation became necessary: the CJC proposed the courts, whereas Sir Rupert proposed the Financial Services Authority (the precursor of the Financial Conduct Authority (FCA)).
The courts and the FCA remain the front runners. They would bring contrasting advantages and disadvantages to the role.
The courts are not a ‘regulator’ in the modern sense. They lack material inquisitive powers and their ability to ‘regulate’ is reliant on the cases litigants bring. Yet, unlike the FCA, the courts are legal experts and the inherent connection between litigation funding and litigation alleviates, to some extent, their lack of inquisitive powers.
The FCA is not an organisation of lawyers. It regulates the financial markets and, while Litigation Funding Agreements are financial instruments, their inherent connection to the disputes ecosystem arguably means that lawyers are better suited to regulate them. But, in contrast to the courts, the FCA is a regulator (with considerable and long-standing expertise). The Financial Services and Markets Act 2000 also provides it with considerable enforcement powers, which it would be able to exercise in the regulation of litigation funding.
While the courts and the FCA are the frontrunners, they are not the only candidates for the mantle of litigation funding regulator.
One of the legal regulators could be in line for the job. All eight of them avoid the disadvantages of both the courts and the FCA, in that they are largely staffed by lawyers but have regulatory powers. Furthermore, they already regulate a reasonable proportion of those working in the industry, given the number of qualified lawyers working in-house with litigation funders.
However, compared to the courts and the FCA, the legal regulators are small organisations. The Solicitors Regulation Authority, the largest of them by a considerable margin, employs approximately 750 people, compared to 16,000 and 4,100 for the courts and the FCA respectively. Additionally, the SRA, which for reasons of size would be the strongest candidate of the legal regulators, is currently under scrutiny for its handling of the collapse of Axiom Ince. The only other organisation with realistic potential to be appointed regulator of the litigation funding industry is still being formed and does not yet technically exist.
If the government concludes (i) something further than the self-regulation status quo is necessary, but (ii) ‘burdensome’ regulation would stifle the industry unnecessarily, it might look to adapt ‘self-regulation’ to ‘self-regulation max’.
An industry appointed regulatory body would likely take a light touch approach, but could easily be set up in a way that counters the perceived strongest failing of the current system: that only 16 of a total of 44 litigation funders operating in the UK are members of the Association of Litigation Funders.
Whatever happens, it is unlikely to happen quickly. Historically, unless the proposals of a review of civil litigation costs include a surefire method to reduce the government’s spend on legal costs (for example, by restricting the scope of legal aid), governments have been slow to implement change.
What is our prediction? Despite the Chancellor’s disfavour of ‘burdensome regulation’ and the FCA’s apparent disinterest in the role, our prediction is that, eventually, the remit of the FCA is broadened to include oversight of the litigation funding industry. We will look at how it (or another regulator) might operate that oversight in our next article.
If you have any questions on litigation funding please get in touch with a member of our funded litigation team.