Blog - Global view
Cash rich or cash poor?
Respected self-regulation is the key to the success of the UK's burgeoning third-party litigation funding market, and the launch of a sector association is a good start, but it needs to be more than a watchdog
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It has been more than a year since the Association of Litigation Funders (ALF) and its new code of conduct was launched with approval from England's Civil Justice Council (CJC), the British government and Sir Rupert Jackson, the English Court of Appeal judge whose report into the costs of civil litigation recommended self-regulation.
The code was drafted by a CJC working party and includes strict capital adequacy requirements – meaning funders need to have the resources to cover their funding liabilities for at least the subsequent 36 months – no right for funders to terminate agreements without good reason, and restrictions on funders' ability to control litigation.
The rationale behind the code -- and the formation of the association to police it -- was clear: to provide credibility and offer reassurance to clients and solicitors about the third-party funding market. It is not dissimilar to a quality kite mark scheme.
At the time of writing, there are nine funder members of the association. This means nine funders that are proved not only to have the resources to cover their funding liabilities, but also understand their contractual commitment to clients, and will not unduly interfere in the litigation. This represents significant choice for a market still in its infancy in the UK.
Unsurprisingly, one of the first points I am asked to clarify is whether my firm is a member of the association, so the message is clearly getting out. Besides, there’s no good excuse for not being a member. I can’t see how a conversation that started with a ‘no’ to that enquiry could progress much further.
One of the most important elements of the code has been the requirements around capital adequacy. This is the corner stone for building legitimacy around third-party funding as it provides the most effective indicator of funders’ intentions. The biggest risk in the world of litigation funding is where a company claims it has funds when it does not. It would be a disastrous situation if a funder ran out of money in the middle of a case, or simply did not pay. Aside from ruining that particular funder’s reputation in the industry, as well as seriously tainting the whole industry, such a situation would leave the client and the legal team high and dry. So this is where the code adds real value.
So while the ALF has been successful in sorting the wheat from the chaff and providing greater transparency of choice for solicitors and their clients, it is still very early days. The association needs to keep its role and the performance of its members under constant review. A guarantee of capital adequacy for 36 months can rapidly change in the course of any one year. How the association monitors and handles any changes surrounding the changing fortunes of funder members will be a major test.
Also important will be how much influence is exerted regarding the implementation of damages-based agreements (DBAs). The ALF has expressed concern over these proposals and suggests that the history of costs in this area means that solicitors who fund litigation should face similar adverse costs exposure to that of litigation funders. The current view of the CJC is that lawyers running DBA’s should have costs immunity. The ALF continues to lobby for equality between funders and lawyers.
Perhaps the biggest measure of success will be the continued self-regulation of the market. If the ALF performs its duties -- acting as a competent and tough regulator and not as a mere watchdog -- then self-regulation will continue. However, if it fails to meet its challenges as the market matures, statutory regulation could become a reality. And while legitimate funders will not fear statutory regulation, it would dent confidence in this burgeoning market.