The number one recommendation of the Civil Justice Council’s final report on litigation funding is to reverse PACCAR. There is much else that will also please the industry
The Civil Justice Council’s 150-page final report on litigation funding, published this week, makes 58 recommendations. It is thorough, considered, and was even delivered ahead of schedule. Perhaps this reflects the importance the working group placed on its number one recommendation: that the Supreme Court’s PACCAR ruling be reversed as soon as possible. As yet, however, there is no indication that the Ministry of Justice is minded to act soon.
In addition to favourable noises on reversing PACCAR, there is plenty in the report to please funders. Funding of arbitration proceedings, for example, which is a huge part of the market, will not be subject to formal regulation. Arbitral centres should be left to decide what they want to do.
On litigation, funders may be disappointed to see a proposed end to self-regulation. They will be relieved on two fronts, however. First, the report has not gone straight for heavy-handed regulation by the Financial Conduct Authority. Instead, it leaves a lingering threat of FCA regulation, to be brought in if its suggested ‘light-touch’ approach is not shown to be working well after five years.
Second, it draws a crucial distinction between funding for commercial parties and for consumers. Whereas the proposed rules governing litigation funding agreements (LFAs) for commercial parties are minimal, those covering LFAs for consumers, or any parties in collective proceedings, representative actions or group actions, are more extensive. That strikes the right balance, giving greater protection to potentially vulnerable consumers, but leaving sophisticated commercial clients, advised by their own lawyers, free to negotiate terms with the funder.
The CJC recommends that responsibility for this new regulation would rest with the lord chancellor, who would establish a set of regulations by statutory instrument. LFAs that fail to comply with these rules will be unenforceable, but the courts will have the important discretion to waive any such breaches if they wish. This is a low-cost but effective way of bringing about statutory regulation.
'[Regulation should] protect funders from abuse by unethical or unscrupulous individuals or organisations, not least where crowdfunding is being used as a means to promote unmeritorious litigation'
Civil Justice Council, Review of Litigation Funding
The new regulations would cover issues such as capital adequacy risk, anti-money laundering measures and an independent procedure for resolving funding-related disputes. They would be especially tough in preventing funders from controlling litigation either directly or indirectly, including in relation to settlements and settlement negotiations. Such a breach of the regulations would not only render the LFA unenforceable, but also make the funder liable for the funded party’s costs and adverse costs.
One thing the regulations will not do, even in consumer litigation, is set any cap on a funder’s return. This was a key battleground in the consultation and funders have won the argument. The CJC concluded that caps are a ‘blunt instrument’ that cannot properly account for the ‘variable risk’ of funding different claims. For consumers and group actions, however, protection is provided by a requirement for the court to approve the level of a funder’s return as being ‘fair, just and reasonable’.
Funders did not win all the big fights, however. They argued strongly against any requirement for the presence of funding to be disclosed, pointing out that defendants are not compelled to reveal anything about the existence of insurers. The CJC was unconvinced. It has recommended that the fact of litigation funding, the name of the litigation funder and the ultimate source of the funding should be disclosed to the court and the other parties ‘at the earliest opportunity’ after the LFA is signed. The full LFA will not need to be disclosed, however.
The review contained other significant proposals. Addressing warnings over portfolio funding following the collapse of SSB Law and Pure Legal, it said such funding should be regulated by the FCA as a form of loan. Concerns had been raised that there may be a systemic problem, with firms having developed high-risk and unstable business models that depend on unrealistically high levels of return.
The CJC also recommended that all forms of crowdfunding should be regulated. Where funders receive a financial reward if the litigation succeeds, it should be subject to the same regulatory regime as that for litigation funding of consumer or collective proceedings, given the need to protect the interests of individual subscribers to crowdfunding.
Where it does not involve financial reward in the event of success, the regulatory approach should be different. However, any regulation should mitigate the risk that crowdfunding may be used as a vehicle for money laundering or other forms of criminality. It should also ‘protect funders from abuse by unethical or unscrupulous individuals or organisations, not least where crowdfunding is being used as a means to promote unmeritorious litigation’.
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