The Civil Justice Council (CJC) has recommended the introduction of a “light touch” regulatory regime for litigation funders in its eagerly awaited final Litigation Funding Working Party report.

The working party, which was co-chaired by Dr John Sorabji of University College London and Mr Justice Simon Picken, also recommends that legislation should be enacted “as soon as possible” to reverse the impact of the 2023 House of Lords PACCAR judgment, which was considered to have rendered thousands of litigation funding agreements (LFAs) unenforceable by determining them to be damages-based agreements (DBAs). 

While the reversal of PACCAR is likely to be welcomed by all sectors of the profession, given the uncertainty it created, the working party makes a further 57 recommendations aimed at improving the regime governing third-party funding that will take longer to digest.

At the heart of the report are a series of recommendations designed to establish “a formal, comprehensive regulatory scheme” for litigation funders, overseen, for the time being at least, by the Lord Chancellor, although handing responsibility to the Financial Conduct Authority could be considered in five years. A key exemption to the proposed regime, however, is arbitration, which the working party has opted to leave within the remit of arbitral centres.

Sir Geoffrey Vos, Master of the Rolls, head of civil justice and chair of the Civil Justice Council, said: “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.”

Key elements of baseline regulation for funders are cited as “case-specific capital adequacy requirements; codification of the requirement that litigation funders should not control funded litigation; conflict of interest provisions; the application of anti-money laundering requirements; and disclosure at the earliest opportunity of the fact of funding, the name of the funder, and the ultimate source of the funding”.

However, the report says the terms of LFAs should not generally be disclosed and it rules out caps on funders’ returns.

The working party goes on to envisage additional requirements for funding that is provided to consumers and in collective proceedings, representative actions and group litigation.

These include the application of a regulatory ‘Consumer Duty’ and a requirement for funded parties to receive independent advice on proposed agreements provided by a King’s Counsel.

Court approval is also recommended for collective proceedings on “the terms of the agreement and, particularly whether the litigation funder’s return is fair, just and reasonable”.

Enhanced notice of the terms is also envisaged during any opt-out period to enable those affected to make an informed decision on whether to opt out.

The report also recommends “mechanisms… to secure the independent, low-cost and binding resolution of disputes between funders and funded parties” – a proposal that comes against the background of a bitter dispute between Walter Merricks, the class representative in this month’s landmark settlement with Mastercard over interchange fees, and the funder, Innsworth Capital, which opposed the deal.

“Such a mechanism should include provision for the promotion of consensual resolution of such disputes,” the report states, adding: “Regulations should also set out the consequences of regulatory breaches.”

Neil Purslow, chairman of ILFA’s executive committee, said: “This thoughtful and considered report quite rightly concludes litigation funding can and should remain an essential route to securing access to justice, while ensuring it works fairly for claimants and funders. We look forward to exploring the CJC’s recommendations on any future proportionate regulation.”

The working party’s recommendations in relation to PACCAR, meanwhile, promise a revival of fast-tracked legislation introduced last year by the then-Conservative party to reverse the judgment’s impact, which received crossbench support.

The legislation failed to pass through Parliament before last June’s snap general election and the newly elected Labour administration decided not to revive it and instead await the conclusion of the CJC review of funding.

Welcoming the report, David Greene, co-president of CORLA, the UK’s Collective Redress Lawyers Association,  and senior partner of Edwin Coe, said: “Reversing PACCAR will finally put an end to the uncertainty that has hampered funders’ willingness to invest in important and meritorious cases. We urge the government to take up the recommendation immediately. The proposed light-touch regulation of funders is a much-preferred route in this very young market.”

A summary of some of the review's "not so obvious" recommendations, posted on LinkedIn by Tets Ishikawa, managing director of LionFish Litigation Finance, included the following:

• R10 – Capital adequacy requirement at the case-specific level.

• R38 – Costs budgeting/management to be mandatory for all funded collective proceedings, representative and group actions. Other funded claims to be considered for costs budgeting under the Civil Procedure Rules.

• R40 – Only specially authorised judges, suitably trained, to be allocated to manage funded claims.
• R41 – Recoverability of funding costs in limited cases, noting the majority were in favour and highlighting the Post Office case as a paradigmatic example of where recoverability should have been allowed.

• R43 – No presumption of security for costs to be ordered against a funder where all regulations have been complied with and there is sufficient after-the-event insurance in place with an effective anti-avoidance endorsement.

• R55 – No caps on solicitor returns in conditional fee agreements and DBAs entered into by commercial parties.