The Civil Justice Council (CJC) has published its interim report on litigation funding in England & Wales, and launched a consultation on the topic. It is hoped that the review will bring clarity around the regulation of litigation funding, following the uncertainty caused by the PACCAR decision. Any change to the regulatory landscape will have significant implications for class actions, which are typically backed by third-party litigation funders.

Litigation funding in class actions

Class actions are attractive to litigation funders, due to the economies of scale and large financial rewards that can be achieved by pursuing lots of claims collectively. A funder will cover the cost of the legal proceedings, in return for a proportion of any compensation or financial settlement awarded to the funded party. This arrangement is typically set out in a litigation funding agreement (LFA).

The PACCAR decision

In R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] UKSC 28 (“PACCAR”), the Supreme Court was asked to consider whether LFAs count as damages-based agreements (DBAs), which are subject to a restrictive regulatory regime set out in the Damages-Based Agreement Regulations 2013 (the “Regulations”).

The Court found that an agreement which entitles a funder to a share of damages awarded to the funded party counts as a DBA. This brought most existing LFAs within the scope of the Regulations and rendered many unenforceable. Pre-PACCAR, LFAs were generally considered not to be DBAs, and therefore not subject to the Regulations. The decision has caused considerable uncertainty in the litigation funding market. Many funders have had to change the terms of their LFAs to bring them in line with the Regulations.

The CJC’s review

Earlier this year, we wrote that the Litigation Funding Agreements (Enforceability) Bill had been introduced into Parliament by the then Conservative government, with a view to addressing the uncertainty created by PACCAR. The Bill would have reversed PACCAR and clarified that LFAs would not be subject to the Regulations. The Bill didn’t make it through the pre-election wash-up before Parliament was prorogued on 24 May 2024.

The new Labour government has confirmed that it will await the findings of an ongoing review of the litigation funding landscape by the CJC before legislating to address the effects of PACCAR.

The interim report

The CJC published its interim report and consultation on 31 October 2024. The purpose of the report is to provide the background to the issues being examined, which include whether and how third-party litigation funding in England & Wales should be regulated, and to invite views on these, to inform the review’s final report. The interim report does not make any conclusions or recommendations at this stage.

In relation to the question of regulation, the report sets out, and seeks view on:

  • The current approach of voluntary self-regulation. The litigation funding market in England & Wales is currently self-regulated, under the Association of Litigation Funders’ voluntary code of conduct (the “Code”). The report highlights several limitations of this model, including that, according to the report, an estimated 44 funders operate in England & Wales, of which only 16 are signed up to the Code. The report questions whether, in light of the significant expansion of the litigation funding market in the 13 years since the Code was introduced, this self-regulatory model remains appropriate, or if statutory regulation is now required or desirable.
  • Alternative approaches to regulation. The review seeks to identify the most effective and proportionate regulatory model(s) for third-party litigation funding, noting that different approaches may be better suited to different types of litigation and litigant.
  • Approaches to regulation of third-party litigation funding in other jurisdictions. The report considers the different regulatory approaches in Australia, Austria, Canada, the EU, France, Germany, Hong Kong, Ireland, the Netherlands, Singapore and the US, and notes that the self-regulatory approach is unique to the UK.

What next?

At this stage, the regulation of litigation funding in England & Wales is no clearer than it was immediately post-PACCAR, and the interim report provides more questions than answers. The consultation is open until 31 January 2025, with a final report, including recommendations, expected in the summer of 2025, and any legislative changes to follow.

The interim report’s commentary on the flaws of the existing self-regulatory approach indicates that the final report will likely make recommendations for a more formal regulatory regime. This appears to be in line with popular opinion and market sentiment. Recent polls of both the legal sector and the general public indicate an appetite for stronger regulation, and, at the second reading of the Bill, the House of Lords broadly agreed that a form of regulation is needed.

An alternative view is taken in a report published last month by the European Law Institute (ELI), which is also currently considering litigation funding reforms. The ELI favours a light-touch approach to regulation, and warns that over-regulation of litigation funding could restrict access to justice. The CJC is likely to have regard to the ELI’s conclusions in reaching its own, not least because the report was co-authored by English High Court judge, Justice Sara Cockerill, who is also a member of the group carrying out the CJC review.

Given the importance of third-party litigation funding, the CJC’s findings and any resulting reforms to the regulatory landscape could significantly shape how many claims, particularly class actions, are brought in England & Wales. In particular, greater legal certainty around the enforceability of LFAs would be likely to bolster the ongoing growth of class actions. Those engaged in the litigation funding market, and their legal representatives, keenly await answers.

Contributors

Craig Watt

Partner & Solicitor Advocate

Izzy Deane

Solicitor