SRA takes aim at litigation funding

Firms taking on third-party funding for consumer claims will have to jump through a new set of regulatory hoops under proposals floated today following a run of high-profile failures. The Solicitors Regulation Authority said the new rules, published for consultation, focus on 'one of the areas of greatest harm and risk: third-party litigation funding.' 

'We have seen clear evidence that third-party litigation funding can create risks to firm stability and lead to poor outcomes for consumers,' Aileen Armstrong, executive director of strategy and policy, said. According to the consultation document, 'some solicitors' are not carrying out due diligence to ensure that funds received are not criminal property or were transmitted in breach of the sanctions regime. 

The proposed new requirements are part of the SRA's programme to address concerns about how solicitors and firms are handling high-volume consumer claims. It follows the failures of SSB Law in 2024 and PM Law Group earlier this year. 

Five new requirements are proposed. They would include:

• New standards for professional conduct, specifying the need to maintain independence from a funder, to act in clients' best interests and disclose confidential information only with clients' consent and to inform clients that funders are not SRA-regulated. These 'fundamental' obligations would apply to all solicitors and firms involved with third-party funding rather than being limited to the consumer claims sector.

Firms handling funded consumer claims would also have to:

• Provide clients with a 'prominent funding information document'. This would explain in 'clear and plain' language the availability of other options, including redress schemes and claiming on legal expenses insurance. 
• Notify the SRA when using or arranging litigation funding for consumer claims. 
• Prepare and make available on request to the SRA, a 'third-party litigation funding risk assessment'.
• Make available to the SRA on request a plan setting out how the firm would make an orderly closure if necessary. This would have to be updated every six months and approved by the chief executive or managing partner. 

The proposals come as the government ponders regulation of third-party litigation funding as recommended last year by the Civil Justice Council. The SRA said it would welcome regulation. 'Wtihout decisive action in this area, some of the fundamental risks driving adverse incentives in this market will remain unaddressed.'

Consultation on the proposed new requirements closes on 17 September.