Third degree

‘Social justice warriors or ambulance chasers?’ That was a question recently posed by one European newspaper, in a rare explainer for the general public on litigation funders.

The answer, of course, is ‘neither’. The third-party funding industry exists to generate a profit for investors, and it is somewhat more discriminating than the average CMC claims harvester.

Yet the fact the article was written at all is suggestive. Litigation funding is booming. A new study by RPC which found that UK funders’ assets jumped to £2.2bn last year – a 10-fold increase in a decade – rightly made the business pages.

This sharp increase attests to the ‘normalisation’ of third-party funding and, of course, the surge in class action lawsuits. And yet. Notwithstanding this leap into the mainstream, litigation funding remains effectively unregulated. The Association of Litigation Funders (ALF) requires members to sign up to a code of conduct, which prevents member firms from exercising control over litigation that they fund or causing their litigant’s lawyers to breach their professional duties. But membership of the ALF is voluntary, and not all funders are in the club.

This regulatory lacuna was originally justified by Lord Justice Jackson on the basis that regulation might stifle a relatively new sector – but that argument is surely redundant now.

Pressure is building. One significant recent call for regulation came in a report submitted by Axel Voss MEP to the European Union Legal Affairs Committee last June. This proposed that the European Parliament should request that the Commission adopt a directive to regulate third-party funding in the EU.

There is similar momentum in Australia, which has long had a highly developed third-party sector. Just this week, the company directors lobby in Australia called for litigation funders to be licensed to protect class action participants.

So how long will the funding industry be able to resist? Globally, the sector deploys a powerful voice in the form of the International Legal Finance Association. Unlike ALF, ILFA does not have any regulatory role and so is freer to speak out on ‘red tape’. ILFA is always quick to make the argument against regulation. But now, more than ever, it seems that the association might be staving off the inevitable.