Regulation of third-party litigation funding in England and Wales recommended

The Civil Justice Council (CJC) also said that the effects of a 2023 ruling by the UK Supreme Court, which meant that certain funding agreements would not be enforceable, should be reversed through new legislation.

The recommendations were contained in the CJC’s final report from its review of litigation funding (150-page / 1MB PDF), which was commissioned in April 2024 by previous lord chancellor Alex Chalk.

On new regulation, the CJC supports a tiered system where all litigation funding arrangements are subject to “a minimum, base-line, set of regulatory requirements” but where litigation funding provided to consumers or parties engaged in mass claims – through either collective proceedings, representation actions or group litigation – is subject to additional, though still “light-touch”, regulation.

The base-line regulatory regime, it proposed, should impose case-specific capital adequacy requirements; a codified requirement that litigation funders should not control funded litigation; conflict of interest rules; anti-money laundering requirements; and a series of early disclosure obligations around “the fact of funding, the name of the funder, and the ultimate source of the funding”, it said, adding that the terms of litigation funding agreements (LFAs) should generally be outside the scope of disclosure.

The additional regulatory requirements for funding consumer or mass claims should, the CJC said, include a requirement that the funder has complied with a regulatory ‘consumer duty’ that would be based on, but not the same as, the consumer duty requirements that financial services firms regulated by the UK’s Financial Conduct Authority (FCA) already face. They would also include provision to the funded party of independent legal advice from a King’s Counsel and enhanced disclosure obligations to the court designed to “consider and approve, on a without-notice-to-other-parties basis, the funding arrangements and, particularly whether the litigation funder’s return on its funding is fair, just and reasonable”.

The CJC said the new regulatory regime should avoid imposing “statutory caps or mandatory minima” in respect of funders’ returns, describing those mechanisms as “a blunt instrument” that “are unable to take proper account of the variable risks of funding different claims”, as well as “unnecessary as a means to secure effective consumer protection” given the enhanced disclosure requirements and court-review process it has proposed.

Among its other recommendations, the CJC said the standard terms for LFAs should be developed and annexed to the regulations. This, it said, should bring greater clarity in the market and consumer protection, as well as reduce the cost of providing litigation funding.

The new regulations, which would not apply to the funding of arbitration proceedings, should be issued by the lord chancellor and developed with reference to principles established by the European Law Institute (ELI) for EU member states – to, the CJC said, “ensure the regulations and standard terms are sufficiently light-touch in approach”.

The CJC does not believe the regulatory regime should be developed by the FCA at this stage, but it suggested a review of the matter be undertaken after five years.

Gemma Erskine of Pinsent Masons said: “Of particular interest is the CJC’s view that this regulatory approach should apply not only to the Competition Appeal Tribunal (CAT) regime but also to wider collective proceedings, including representative actions, brought under Civil Procedure Rule 19.8.”

“The CJC advocates for a general mass action pre-action protocol. This specifically envisages in both cases, following ‘certification’, that class members should receive an opt-out notice specifying the deadline to opt out, confirming that the litigation is being funded by a third party, identifying the funder by name, and disclosing the funder’s approved return in the event of success. This transparency is intended to help class members make an informed decision about whether to remain in or opt out of the proceedings, based on the expected share of damages allocated to the funder,” she said.

“It is not precisely clear what the CJC means by ‘certification’ in both contexts. At present, a formal certification stage exists only within the CAT opt-out regime. If the CJC intends to propose that all claims brought under Civil Procedure Rule 19.8 should also be subject to a certification process, this should be stated more explicitly. Given it is not, I think it is unlikely to be the intention, though it may suggest alignment as the direction of travel,” she said.

“These are recommendations only. The implementation of any legislative changes will ultimately depend on the priorities and decisions of the Labour government,” Erskine added.

The CJC’s recommendations for regulation in England and Wales come at a time when EU law makers have also been calling for regulation of third-party litigation funding. Earlier this year, the European Commission published a study (707 pages/6.31 MB) examining third-party litigation funding regulation across the EU, which identified the need for clear and consistent regulation but failed to provide a concrete recommendation on what a new regulatory framework should require.

In its report, the CJC also recommended that the effects of the so-called PACCAR ruling by the UK Supreme Court in July 2023 be “reversed by legislation”, adding that the new law “should be both retrospective and prospective in effect”.

The Supreme Court held that third party LFAs which provide for the funder to receive a fee calculated by reference to the damages achieved by the funded claimant were damages-based agreements (DBAs). This had the effect that such LFAs, which included many LFAs then in place in the market, were completely unenforceable in opt-out collective proceedings before the UK’s CAT; and unenforceable in other matters unless they complied with requirements set out in the DBA Regulations 2013, which many LFAs did not.

A Bill to reverse the PACCAR ruling was introduced into parliament by the previous Conservative government, but it fell when parliament broke up for the 2024 UK general election. Shortly after it came to power, the new Labour government confirmed that it would wait for the outcome of the CJC’s review before introducing any new legislation of its own in respect of reversing PACCAR.

The CJC said the new law “should make clear that there is a categorical difference between contingency fee funding, i.e., funding provided to a party to a dispute by their legal representative (through a [conditional fee agreement or CFA] or DBA) and litigation funding, i.e., funding provided by an individual or a business who is not a party’s legal representative (litigation funders) for the purposes of dispute resolution”. It added: “The two are separate and should be subject to separate regulatory regimes.”