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EU plans to regulate third-party litigation funders meet mixed response

Out-Law News | 11 Oct 2022 | 1:12 pm | 4 min. read

An EU parliament vote in favour of new regulation of Europe’s litigation funding sector is a notable development but its impact remains to be seen, according to one legal expert.

The parliament’s resolution, adopted last month, states that, although third-party litigation funding (TPLF) is currently little used in most EU member states, the practice is growing and has the potential to support access to justice – including in public interest and other consumer cases – with greater regulatory oversight.

The resolution recommended a number of changes to boost transparency for parties over the involvement in cases of third-party litigation funders, who help cover the cost of lawsuits in exchange for a portion of any winnings.  It also proposed limits on the percentage share of a court award or settlement that funders can take, and on funders’ ability to unilaterally withdraw funding midway through legal proceedings.

Emilie Jones of Pinsent Masons said: “This is a notable step towards greater regulation of third-party litigation funding in EU member states. However, even assuming the proposed Directive is passed, questions remain over its impact on the third-party litigation funding landscape across the EU. Will the change drive an increase in third party litigation funding, or will the introduction of such robust, mandatory regulation dampen the funding market? Ultimately, it is unsurprising that the proposals have met with a mixed response.”

The resolution came after Members of the European Parliament (MEPs) expressed concerns that third-party litigation funders were able to abuse Europe’s largely unregulated market – sometimes abandoning funded parties during the litigation process or demanding a “disproportionate share of the proceeds”. MEPs pointed to a lack of transparency that meant EU courts have, on occasion, made awards to claimants “without realising that a share of the award, which might sometimes be disproportionate, will subsequently be redirected to litigation funders”. It said this was particularly concerning in ‘opt-out’ collective redress systems, where not all class members being represented in an action will be party to any funding agreements.

The parliament also highlighted potential conflicts of interest that can arise through “inappropriate relationships” between funders, representative entities who pursue claims on behalf of claimants, law firms financed on a portfolio basis and other entities that might have an interest in the outcome of a case. 

It recommended establishing common minimum standards for litigation funders across the EU that address these concerns and called for an independent authorisation system for litigation funders that would include governance and capital adequacy requirements. It said supervisory authorities should have powers to ensure that funding agreements are entered into based on a fiduciary relationship and a commitment to act in the best interests of the claimants or other beneficiaries.

MEPs also said funding agreements must disclose any potential conflicts of interest to claimants and intended beneficiaries, and not include various clauses, such as those which would grant litigation funders power to influence decisions or which purport to limit funders’ liability for adverse costs. If enacted, the proposals would place significant limits on funders’ ability to unilaterally withdraw their funding during proceedings.

Claimants or their representatives would have an obligation to inform a court of the existence of a TPLF agreement – and the identity of the funder – under the parliament’s proposals. Claimants would also need to provide unredacted copies of the funding agreement if asked by a court or a defendant, and courts would be given powers to make adverse costs orders against litigation funders.

The resolution also addresses the new EU Representative Actions Directive (RAD), which member states are due to transpose into national laws by the end of this year. The RAD requires member states to ensure that their procedures for consumers to bring mass actions meet certain minimum standards. The amended or new procedures member states will be required to introduce must be operational from June 2023.

A draft directive accompanying the resolution on TPLF noted that in some member states, legal costs “may represent a significant barrier to access to justice”, and that member states that do not currently permit TPLF may wish to consider introducing legislation to allow it, subject to safeguards. It said that the “qualified entities” that are allowed to bring representative actions under the RAD must not be prevented from exercising their right to seek redress by the costs of proceedings. 

The resolution also noted that, while the RAD lays down some safeguards relating to litigation funding in the context of mass actions, those safeguards do not apply to other types of potentially funded action. 

Johanna Weißbach of Pinsent Masons said: “The litigation funding landscape is closely inter-connected with the landscape for mass claims – whether in the form of class, group, collective or representative actions. This is expressly recognised in the resolution, which makes frequent reference to the introduction of the RAD and indeed suggests that the European Commission should, before submitting a proposal for a directive on TPLF in the terms set out, monitor the effects of the RAD once in force.”

“The introduction of the RAD was strongly driven by concerns on the part of the EU about consumer access to justice, so it is welcome to see that they are also considering countervailing concerns about the potential for excessive litigation, disproportionate returns to funders and costs exposures for defendants facing funded claims,” she added.

The parliament said that the European Commission should monitor the development of TPLF in the member states and take the effects of the RAD into account once the deadline for its application expires next June. It asked the Commission to submit a proposal for an EU directive to establish common TPLF minimum standards.

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