The Civil Justice Council (CJC) has published its highly anticipated final report on the regulation and development of litigation funding in England and Wales. This comprehensive report addresses the implications of the UK Supreme Court decision in R (on the application of PACCAR Inc & others) v. Competition Appeals Tribunal & others,[1] examines various funding mechanisms, and proposes legislative reforms to clarify and regulate these funding types.
Background
In its judgment in PACCAR, the Supreme Court held that litigation funding agreements that entitle funders to recover a percentage of any damages awarded were a form of damages-based agreement (DBA).[2] This decision called into question the validity and enforceability of many such agreements, where they did not comply with the strict statutory conditions for DBAs. The government initially sought to counteract the impact of the judgment with the draft Litigation Funding Agreements (Enforceability) Bill 2024, which aimed to clarify that such funding agreements were not in fact DBAs. However, the bill was not finalised by the time of the UK general election last year and was not enacted before Parliament was dissolved. The new Labour government said that it would await the CJC’s final report before considering further steps. The final report follows the CJC’s interim report, which covered the current position of third-party funding in England and Wales and considered the approach taken in other jurisdictions.
Key recommendations
The report makes a total of 58 recommendations, covering a broad spectrum of issues connected with litigation funding arrangements. The key recommendations are:
- Legislation to reverse PACCAR: The report recommends the adoption of legislation to make clear that litigation funding is not a form of DBA and to clarify that the provision of litigation funding is not a form of claims management service. The CJC states that such legislation should reverse the effect of PACCAR and recommends that it should have both prospective and retrospective effect.
- Regulation of third-party litigation funding: The report proposes the introduction of statutory regulation of litigation funding through regulations issued by the Lord Chancellor. It suggests a light-touch regulatory framework, with differential regulation for commercial parties and consumer parties, including those engaged in collective proceedings.
- Consumer protection: The CJC considers that additional regulatory requirements should apply to litigation funding provided to consumers and parties engaged in collective proceedings. These include:
- The application of a regulatory Consumer Duty, based on the Consumer Duty of the Financial Conduct Authority (FCA), requiring the funder to provide the funded party with clear advance information about the nature of the funding, its benefits and risks.
- The funded party should receive independent legal advice from a King’s Counsel (KC), paid for by the funder, on the terms of the proposed funding agreement.
- The funded party should disclose the funding agreement to the court to enable it to consider and approve the arrangements, on a without-notice-to-other-parties basis.
- Court rules and costs management: The report recommends reforms to court rules to enhance the management and budgeting of costs in funded litigation. This includes mandatory costs budgeting for all funded collective proceedings, representative actions and group actions. In all other proceedings, it recommends an amendment to the civil procedural rules to require the court to consider receipt of litigation funding by a party as a factor in assessing whether proceedings should be subject to costs budgeting. It also recommends that the court be given the power to make pre-action costs budgeting and case management orders to assist with early costs management measures.
- Portfolio funding and crowdfunding: The CJC considers that portfolio funding should be regulated as a form of litigation loan by the FCA and require funders to comply with anti-money laundering regulation and capital adequacy requirements. The report recommends that crowdfunding for litigation should be regulated, with separate regulatory regimes for financial reward-based and nonfinancial reward-based crowdfunding.
- Legal expenses insurance: The report encourages the government to consider with the insurance industry what steps can be taken towards increasing the uptake of before-the-event insurance. More generally, the report suggests that work can be done by the government, legal regulators, the insurance industry, employers, trade unions and consumer organisations to promote the uptake and utility of legal expenses insurance.
- Standard terms and dispute resolution: The CJC recommends the development of standard terms for litigation funding agreements to introduce clarity in the market and improve consumer protection. It also recommends the establishment of an independent, binding dispute resolution mechanism for the resolution of disputes between funders and funded parties, which promotes the consensual resolution of such disputes.
- Access to Justice Fund: The report highlights that the government should consider introducing an Access to Justice Fund, funded by a small percentage of profits from litigation funding and contingency fee agreements, to support early legal advice and alternative dispute resolution.
Implementation
The report recommends a twin-track approach to implementing its recommendations. The reversal of PACCAR should be implemented as soon as possible to promote certainty regarding the status of litigation funding arrangements, while other recommendations should be subject to separate primary legislation, including provisions for the making of secondary legislation.
Conclusion
The CJC’s final report offers comprehensive recommendations for reform for an industry that has recently experienced a significant amount of uncertainty. Given the range of conclusions that the CJC could have reached that might have had the effect of stifling or limiting the litigation funding market, the final report’s recommended proportionate and ‘light-touch’ approach to regulation instead will provide some relief to litigation funders. The proposed reforms aim to promote certainty and effective access to justice, ensure fair and proportionate regulation of litigation funding, and improve the provision and accessibility of various funding types. It remains to be seen whether these recommendations are accepted by the government and what steps will be taken to action the changes envisaged.
[1] [2023] UKSC 28.
[2] See our On the Record article summarising the decision.
Contributors
Victoria Barlow