Litigation funding: Competing Interests

The litigation funding industry was in the headlines for all the wrong reasons last month. As the Gazette reported, funder Woodville Consultants, based in Pontypridd, South Wales, collapsed in July having raised an estimated £390m. Many individual investors who were seeking to invest in law firms running motor finance redress claims have been left out of pocket.  

Woodville made use of controversial ‘loan notes’, whereby investors lend money to a company for a set period in return for interest, but risk losing everything if the company fails. The marketing of loan notes to retail investors is banned by the Financial Conduct Authority, and last month Woodville found itself in an FCA warning notice. The failed funder was held up as an example of the potential risk of loan notes to retail investors. Meanwhile, the collapsed funder’s administrators are also investigating allegations that it used money raised from new investors to meet promises of returns to previous investors. 

As the full repercussions of Woodville’s collapse unfold, calls for stronger regulation of litigation funding, which seemed to have quietened since the Civil Justice Council published its report on litigation funding reform in June 2025, will no doubt grow louder. The CJC recommended statutory regulation of the industry which would be light touch for commercial parties, but heavier where funding is provided to consumers, as in motor finance claims. 

Neil Purslow, chair of the executive committee at the International Legal Finance Association (ILFA), notes that events at Woodville have prompted ‘opportunistic calls for regulation from those determined to constrain access to justice’. However, he asserts that the ‘fairly unique set of circumstances’ involving Woodville ‘should be looked at in isolation’.

He explains: ‘Woodville did not raise money in the way that diligent, established litigation funders, such as ILFA members, operate. It raised money from retail investors, sold to them through IFAs [independent financial advisers], and lent that money to law firms. It was not entering into funding agreements with the people bringing claims. ILFA members raise capital almost entirely from institutional investors, many of whom are regulated for that purpose.’

Would the CJC’s proposals for regulation of litigation funding have prevented the Woodville scandal? ‘Woodville’s difficulties came from capital-raising and its obligations to investors,’ Purslow says. ‘That’s a question of investment regulation, not litigation funding regulation, and sits squarely within the FCA’s remit, which it has rightly raised concerns about.’

Anthony Maton, senior partner at litigation firm Hausfeld, observes that there are essentially two funding markets in operation: the ‘very sophisticated’ funding market, largely backed by hedge funds, that finances big-ticket litigation and arbitration; and the market for funding high-volume, mass consumer claims, where scandals have occurred.

‘The real danger is that what’s gone wrong there drags over to what is happening in the sophisticated commercial market; and a one-ticket approach is taken, whereby we find that the funding market for the high-value complex cases is caught up in the rest of it, and the appetite for that money to get involved disappears, or at least dissipates, and we then find a real access to justice problem. There clearly is an issue about how you regulate these high-volume mass claims, while trying not to allow that to get in the way of a much more sophisticated market,’ he reflects.

In July, the Solicitors Regulation Authority, which regulates solicitors rather than litigation funders, published proposals to ‘strengthen requirements’ for solicitors using or arranging litigation funding in consumer claims. These include relatively straightforward obligations to notify the SRA when litigation funding is being arranged, to carry out a funding risk assessment, and to provide clients with summary documents before they sign up to funding. 

Alongside this, the SRA also published new guidance for solicitors and law firms on complying with what it described as their ‘existing professional obligations’ in relation to litigation funding. One potentially controversial aspect relates to ensuring a funder has enough money. The guidance says solicitors ‘may wish to obtain evidence that funders are maintaining sufficient levels of capital and liquidity to fulfil their obligations’. Some commentators suggest that rather than placing the onus on solicitors, requiring funders to prove their financial position to a statutory regulator would be more effective.

Competitive environment

Litigation funding is an essential pillar of the UK’s opt-out competition regime, which would collapse without its support. Yet finance for these Competition Appeal Tribunal claims risks drying up. Cases have proved expensive to fund and have so far tended to end either with losses or disappointing returns for the funders that backed them. 

Jeremy Marshall, chief investment officer at Winward Litigation Finance, observes that the CAT’s judges have shown a ‘healthy scepticism’ about some of the cases advanced before them. ‘Once some genuinely meritorious claims, that really are aimed at looking after people who want the claims to be brought, get through the system, we’ll see a change,’ he predicts. ‘But while we’re seeing claims [for] theoretical losses dreamed up by some economist, in relation to losses that claimants don’t even know they’ve got, we’re going to have real difficulty within the jurisdiction. Budgets are going up, and courts aren’t getting terribly more enthusiastic,’ he reflects. 

The CAT regime is now set for a major overhaul. The Department for Business and Trade (DBT) published a consultation in July setting out proposals to achieve ‘swifter and simpler’ competition redress. The deadline for responses is 25 September. The reforms are expected to be slotted into the Competition Reform Bill announced in the King’s speech last May – meaning they may become law by next summer. From the perspective of litigation funders, some of the DBT’s plans are more welcome than others. 

Money matters

One proposal that has funders smiling is a measure to force the CAT to decide whether or not to approve the funder’s return at an earlier stage. Under the DBT’s plans, the tribunal will no longer be able to delay expressing an opinion on this until the very end of the case, as it currently likes to do. Instead, it will have to give an indication at the outset – at certification stage – as to whether it thinks the return proposed in the litigation funding agreement is reasonable. ‘This is an issue that funders are very concerned about,’ explains Purslow. ‘I’m making a multi-million-pound investment, and at the end, someone will decide [my return] by sticking their finger in the air, and with the benefit of hindsight. That’s not a certain environment – and the penny has properly dropped [with the DBT] on that element.’ Under the DBT’s plans, at certification the CAT will not only consider the level of payment, but also its structure; with a presumption that funders will receive their return when damages are ordered, or a settlement is approved, without needing to wait for the outcome of distribution.

While this gives greater comfort to funders early on, the CAT will still have discretion to change its mind about the reasonableness of the return if, for example, the damages ultimately awarded differ considerably from the sums originally anticipated in the funding agreement. Might this undermine certainty for funders, and effectively mean the CAT will still ensure a funder’s return is never too big? Purslow does not think so: ‘No one’s ever going to box the CAT in. It will always reserve the ability to do the right thing in every case…. The funder will never come out disproportionately well if you deliver a good result – but as long as you are aligned, I do think there is the potential that you could end up with a big result.’

Taking a cut

Another key proposal from the DBT seeks to address a huge problem with the current regime: litigation funding is only available for claims worth around £500m or more. That leaves many valid claims that cannot be brought because they are not big enough. The DBT plans to resolve this by scrapping the current ban on damages-based agreements (DBAs) in the regime. That will pave the way for lawyers to act on a contingency fee basis, taking their fee as a percentage of any damages awarded. Lawyers have welcomed this idea, but the implications for funders are more mixed.

‘This is something we’ve advocated for and are very keen on... it could really shake up the market, and allow smaller and more interesting claims to be brought,’ enthuses Maton. ‘Instead of this £500m threshold we’ve got at the moment, you’re suddenly in a world where you can bring a £100m, or £150m, or £200m claim. That has to be a good thing for the regime – and we won’t be dependent on funders fronting them up all the time. Law firms will have more of their own volition about what they can do.’

The DBT notes that allowing law firms to act under a contingency fee has been very successful in Victoria, Australia, where it has lowered the cost of funding and increased returns for consumers. 

Andrew Leitch, partner at Hogan Lovells Cadwalader, predicts that the move will open up a new layer of cases. ‘Litigation funders take very expensive capital; they borrow from people who are expensive,’ he explains. ‘It’s a high-risk investment. Funders themselves hire expensive ex-lawyers to assess cases, have contacts in the market to bring in cases, and they have high running costs – many have West End premises. So they have to make pretty punchy returns to stay in business. Whereas law firms have a balanced portfolio of cases. They may do a couple on DBA arrangements, and they don’t need the same sort of return to feed all those mouths.’

All this will put pressure on funders to reduce their pricing. ‘It will bring down funder returns, because if you have law firms with the capital to back the case, that think they can do it cheaper, that’s a new field of competition for litigation funders,’ explains Leitch. 

‘There’s definitely yin and yang for funders,’ says Maton. ‘It should open up more opportunities for them, in the sense that law firms can do DBAs and so do a wider range of cases, and will require funded money at least in some instances, so there should be more opportunity. Because suddenly law firms can actually front up the investment risk, rather than only the funder, and they’re able to do it in a way that puts competition on the pricing.’ 

Will law firms be able to fund entire claims themselves? Potentially, yes, but this will be rare. Maton says: ‘What I see as more likely is firms effectively getting portfolio funding, that’s either repayable as a portfolio of funding per se, or as a capital investment in the firm… You can raise a fund that you can then apply across cases.’

He adds: ‘Funders like portfolio funding because it spreads risk, and there are some firms in the market that do [already] have portfolio arrangement deals; so you could either do that, or have capital put into the firm, which has the same effect for a funder, because you’re spreading the risk – it’s just different in the way you set it up. That itself lowers the cost of the borrowing. One reason why CAT claims are so expensive is that it’s a single risk. The classic example is insurance – the more you spread the risk, the cheaper it becomes, so this should allow that to happen.’

Purslow observes: ‘[DBAs] will open up different routes for lawyers and funders to engage. It’s a very useful addition to the arsenal… because it facilitates the capital coming in, by giving it lots of channels. I can see there’ll be a real appetite from law firms to do it, and many funders will think, this is a good option, I can do lots more cases across a portfolio, I can mitigate my risk that way.’

Should funders be worried that law firms may be able to bring CAT claims without needing them? ‘They’ll definitely need the funders,’ Purslow asserts. ‘They’ve got to pay counsel, who are expensive in this space; they’ve got to pay experts – they are eye-wateringly expensive – and these cases are multi-year investments. So there absolutely needs to be funded litigation.’

Law firms might need money, but do they need to go to litigation funders for this – or might there be cheaper ways to get hold of it, if the firm is prepared to shoulder the risk? 

‘There are lots of ways, but it all comes down to the same problem – which is about risk and return,’ insists Purslow. ‘A law firm could, say, borrow it from the bank on a full recourse basis, but whether it would actually want to do that, or its partners would want to do it, is another matter. It’s all the same dynamics as to why use funding in the first place.’

When it comes to obtaining capital to fund claims, structures are already emerging that broaden the potential sources beyond the traditional channels, however. Maton explains: ‘Classically, the litigation funding market has come out of hedge funds. But what we’re seeing some of in the market at the moment is litigation funding coming from more traditional investor-type funder sources, backed by insurance wraps that basically protect the capital.’

Under a DBA arrangement with a law firm, Maton adds, ‘you have much more chance of attracting non-hedge-fund money into structures to invest, making it cheaper… you open that market up to a different type of money. It becomes an asset class where, because you’ve insured the capital, you’re just worried about what the return looks like. Which is the same if you invest in, say, the US stock market’.

Meriting attention

One stinging criticism of the CAT regime is that it allows weak cases to be certified without rigorous scrutiny, sometimes primarily benefiting lawyers and funders rather than the claimant class. The DBT’s consultation highlights that in Gutmann v Stagecoach South Western Trains Ltd [2025] CAT 64. Only around £216,000 went to the underlying class, while stakeholders received more than £10m. The DBT seeks to address this by bolstering the assessment of a claim’s merits at certification, including a costs/benefit analysis at that early stage.

‘This is a big deal,’ observes Leitch. ‘There was much debate in parliament [before the CAT regime came in] about [the prospect of] vexatious claims holding businesses to ransom, where they pile it high at hundreds of millions or billions of pounds, and they get it through certification if there’s not a proper certification standard – and then [as a defendant], you’re in a position where even if you think it’s a terrible case, you’ve got, say, a 10% chance of losing a [case of that size], and you can’t afford to lose. So you end up settling unmeritorious cases.’ 

Leitch adds that while the first claim to come before the CAT was ‘put through the wringer’ as the legislation intended, when Merricks v Mastercard went to the Supreme Court, it effectively lowered the bar for certification. At that point, he says, ‘the claims came flooding in’.

Leitch reflects: ‘Lots of businesses that I speak to, they themselves run product recalls when things go wrong… It’s not that they’re trying to shut down the regime, but they do feel that a lot of unmeritorious cases have been brought, and the defendants have been subjected to huge costs. If you end up winning at the end of the day, then, yes, there’s a costs recovery. But even the 30% that you don’t recover is a lot of money, plus management time and stress that you’re not compensated for. There’s a lazy argument that it’s OK because if you win you’ll get your costs. But I’ve never acted for a client who, at the end of successful litigation, has said, “Well that’s fine – that was no hassle at all”.’

However, Purslow warns that in adjusting the merits test, the DBT should be ‘careful not to close the regime down for potentially good, deserving new cases by creating a bar that’s either too high or too complicated, making the whole process of certification too risky’. He notes that the test proposed by the DBT essentially moves away from the Merricks test and adopts the more rigorous test set out in Evans v Barclays Bank & Ors [2025] UKSC 48. The best approach would therefore be to ‘codify’ the Evans merits test, he suggests, rather than creating a new formulation of it, which would bog the regime down in satellite litigation over its meaning.

Leitch adds that a new merits test need not be overly complex. ‘A lot of the rules are already there,’ he says, ‘but they’ve been very inconsistently applied, or sometimes not applied at all. The level of inconsistency [in the CAT], and the fact that who you get as a judge makes a difference between whether hundreds of millions of pounds of claims value is certified or not, is very unsatisfactory.’

Challenging time

The litigation funding sector faces an unsettling time on several fronts, with the impact of changes to the CAT regime just one challenge. It is now more than three years since the Supreme Court’s damaging ruling in PACCAR severely restricted how funders’ fees can be structured. Yet promises made by various governments to reverse the ruling have yet to be acted on. This now looks increasingly likely to be lumped in with wider reform of the sector based on the CJC’s broad-ranging review – whenever this is implemented.

Julian Chamberlayne, partner at Stewarts, describes funders’ ability to raise funds in the current environment as ‘patchy’. ‘That flow of capital would be better if we had a clearer, stable regime, if we knew which of the CJC’s recommendations were going to be actioned and which were not,’ he remarks. ‘It’s unhelpful that we still haven’t got a definite date for PACCAR reform. We’re still watching and waiting, which is unhelpful because funders, like all financial investors, want to know the rules of the game.’

Rachel Rothwell is a freelance journalist