The Supreme Court ruling which two years ago threw litigation funding into chaos should be reversed by legislation ‘as soon as possible’, the Civil Justice Council has recommended in its final report on the sector, published today.
The CJC recommends a ‘twin-track’ approach that prioritises the reversal of PACCAR through legislation that should be ‘both retrospective and prospective’ in effect. Separate primary legislation would then also be needed to bring in a raft of other reforms, including ‘light-touch’ statutory regulation of funding.
On PACCAR, the CJC says legislation should make clear there is ‘a categorical difference’ between contingency fee funding by lawyers through conditional fee agreements (CFAs) or damages-based agreements (DBAs), and funding provided by litigation funders for the purposes of dispute resolution. ‘The two are separate and should be subject to separate regulatory regimes,’ it states.
In relation to regulation, the CJC proposes statutory regulation of litigation funding through regulations issued by the lord chancellor. It does not recommend regulation by the Financial Conduct Authority (FCA) at this stage; rather, the issue should be ‘revisited’ once the new regime has been in place for five years.
The CJC says only ‘minimal’ regulation is needed where funding is provided to commercial parties, but that regulation should be ‘greater, but still light-touch’ where the funded party is a consumer, or the funding relates to collective proceedings or group litigation.
A ‘minimum, base-line, set of regulatory requirements’ should apply to litigation funding in general. These should include provision for: case-specific capital adequacy requirements; codification of the requirement that litigation funders should not control funded litigation; conflict of interest provisions; and the application of anti-money laundering requirements. The fact that funding is in place, the name of the funder and the ultimate source of funding should be disclosed ‘at the earliest opportunity’, but the terms of litigation funding agreements (LFAs) should not generally be subject to disclosure. The CJC working party rejected the introduction of caps on litigation funders’ returns.
The CJC states standard terms for LFAs should be developed and annexed to the regulations, to introduce clarity into the market and improve consumer protection.
Read more
In relation to costs, the CJC recommends provision should be made for litigation funding costs to be recoverable, but only in exceptional circumstances. It rejected the need for a presumption that litigation funders must provide security for costs, and said the courts’ current approach to the 'Arkin cap' should be codified.
The CJC also makes recommendations to improve the operation of CFAs and DBAs. There should be a single regulatory regime for contingency fees, giving effect to the 2019 reforms drawn up by Professor Rachael Mulheron of Queen Mary University and Nicholas Bacon KC, a member of the CJC working group. The report recommends that legislation should clarify that hybrid arrangements are lawful, while DBAs should be permitted in opt-out collective proceedings in the Competition Appeal Tribunal, on the same basis that litigation funding is permitted. Where commercial parties enter into such funding arrangements, there should be no cap on the lawyer’s return; and responsibility for the new regime should be transferred from the Ministry of Justice to the Civil Procedure Rule Committee (CPRC).
The CJC says its recommendation to reverse PACCAR should be dealt with as soon as possible. All its other recommendations, if accepted, should be the subject of a single, comprehensive statute, which should enable secondary legislation such as new contingency fee regulations and litigation funding regulations to be created.
Neil Purslow, chair of the International Legal Finance Association’s executive committee, said: ‘We hope the government acts on the CJC’s first and most urgent recommendation to legislate at the earliest opportunity to reverse the effects of PACCAR, which for almost two years has denied access to justice for claimants like the subpostmasters.’
A Ministry of Justice spokesperson said: 'Third-party litigation funding plays a critical role in ensuring access to justice but concerns have been raised about the need for greater regulation and safeguards for claimants. We welcome the Civil Justice Council’s review which will help inform our approach to potential reforms and we’ll outline next steps in due course.'
The CJC’s working party on litigation funding was co-chaired by Dr John Sorabji of University College London and Mr Justice Simon Picken. The CJC was asked to conduct a comprehensive review of litigation funding in April 2024 by the previous government.
Sir Geoffrey Vos, master of the rolls, said: 'This landmark piece of work epitomises the raison d’être of the CJC: promoting effective access to justice for all. Litigation funding and its impact on access to justice has long been a priority for the council. This report provides a comprehensive and balanced package of reforms that will ensure that third party funding continues to support access to justice. It recommends the introduction of appropriate and proportionate regulation. The recommendations will improve the effectiveness and accessibility of the overall litigation funding landscape.'
Seema Kennedy OBE, director of business lobby group Fair Civil Justice, welcomed the report.'It is significant that the CJC has called for regulation of the litigation funding industry,' she said. 'This is long overdue. Proper oversight is essential to protect consumers, ensure transparency, and restore public confidence in a sector that currently operates without sufficient safeguards.'
4 Readers' comments