Litigation Funding: growth, regulation, and the barrister’s role

It’s hard to believe that third party litigation funding was once a criminal offence, now that it is a prominent feature on the 21st century litigation landscape. As Tomlinson LJ stated when he gave judgment in the Court of Appeal ruling in Excalibur[1], “third-party funding is a feature of modern litigation” - an “accepted and judicially sanctioned activity perceived to be in the public interest”.

Litigation funding is now positively thriving, and continuing to grow rapidly. Increasing amounts of cash are being poured into the sector, reflecting its attractiveness for even the larger companies. Global funding provider, Burford, says the use of litigation finance by firms grew four-fold between 2013 and 2016. And recent statistics published by Reynolds Porter Chamberlain show litigation funders committed £723m last year to UK litigation (up 25 per cent on the previous year) – firm evidence indeed that business is booming in the funding industry.

Third party funders view the legal claim as a financial asset, and with the right level of risk, will invest in it in return for an equity interest in the claim. Funders typically have deep pockets and stand to profit significantly if the claim succeeds. But if the claim fails – they will have the other party’s costs to pay. And the ‘risk’ factor is increasingly significant for funders given the RBS rights issue ruling of the High Court that a professional commercial funder can have a security for costs orders made against it.

Yet third party litigation funding is not formally regulated, despite regular calls for regulation.

Is regulation on the horizon yet?
Not in the short term, as government has resisted calls for regulation so far, saying it has no specific concerns on the status quo. For now, the industry is self-regulated by the Association of Litigation Funders, which was set up by various funders in 2011 for that purpose (with Lord Justice Jackson’s approval).

If a litigation funder wishes to join the ALF, there are conditions: it must maintain access to at least £5m of capital, and agree to abide by ALF Code of Conduct. The Code sets out clear rules governing the relationship between funder and client, as well as providing clarity on issues including case control, settlement, and withdrawal. This means that the badge of ALF membership provides some measure of confidence to clients and solicitors.

But critics are not satisfied with self-regulation. Joanne Lane, MD of Temple Funding (which manages more than £50m of business annually) has called for regulation by the Financial Conduct Authority saying an unregulated market impacts on a lawyer’s ability to ensure client-care best practice.

In his final report in 2009, Review of Civil Litigation Costs, Lord Justice Jackson said “…third party funding promotes access to justice’, though he recognised it has its limitations. Today, there are clear concerns as to just how far third-party funding does promote access to justice in practice.

Former Justice Minister, Lord Faulks QC, is another high-profile voice calling for regulation to ensure the protection of users, and to preserve access to justice. For the lay client relying on third party funding for a claim, for instance, it will spread the risk of litigation - but at the risk that it will recover (probably substantially) less if they win. Add in the risk that judges could put a red line through some costs on a claimant’s budget and/or reduce the hourly rate indicated – the claimant’s position is potentially weakened - with the risk that defendants are in a stronger position.

Whilst the Government’s stance to date is to resist regulation, would formal regulation be a good and workable move in reality? At a ‘round table’ discussion held by the Law Society Gazette earlier this year, Nick Pontt, head of financial services litigation at Browne Jacobson, said government regulation of the sector could be problematic: “I find it difficult conceptually, because we’re talking about product where we are not [always] sure what it really is – is it a private equity fund, is it a hedge fund? How is it run? Each vehicle is different under different mandates, and currently the hedge fund industry and the private equity fund industry – other than general financial regulations – are unregulated.”[2]

So what’s the barrister’s role in litigation funding?
The cost of litigation funding is increasingly a critical factor for counsel at the start of a case. Third party funding is commonly used to fund counsel’s fees (often on a discounted Conditional Fee Agreement basis) as part of a larger funding package for claimants.

Barristers play an important role in the context of the overall economics of a dispute, a role which should not be underestimated. Their fee arrangements directly affect the finances of the case and, significantly, the cost implications for the parties to a claim.

Where third party litigation funding is an option, counsel’s initial views of the merits of the claim are vital to funders. They may be required by the funder to provide an opinion on the prospect of success of the claim (typically looking for an opinion that the merits of the case are at least ‘good’ if not ‘strong’) - as well as an idea of the level of quantum. The aim, of course, is to get the funder to agree to finance some or all of the client’s legal fees in exchange for a share of any recovered damages.

Counsel should ensure that any proposed funder is a member of the AFL for the protection of the parties in the case – and to protect their own interests. Whilst there is no independent regulator for litigation funding, the ALF makes clear it takes seriously its responsibility to ensure members’ compliance with the Code of Conduct, and deals robustly with violations of the Code.

[1] RBS Rights Issue Litigation [2017] EWHC 1217
[2] Law Society Gazette

 

 

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