FCA regulation for litigation funders – it should be the law

Temple Legal ProtectionTemple Funding is urging litigators to undertake more detailed research when selecting third party funders, and joined calls for the sector to be properly regulated by the Financial Conduct Authority (FCA) as it continues to grow.

Joanne Lane, Managing Director of Temple Funding, shares her thoughts:

The introduction of the Jackson reforms on civil litigation costs has led to key changes in funding and after-the-event insurance. In turn, this has seen third-party funding assume a more prominent role. The reforms, combined with low interest rate returns, have led to a number of new entrants in the market.

In a rapidly growing litigation funding sector, I agree with calls for the third-party funding industry to be properly regulated, to ensure protection for users of the facilities and demonstrate that access to justice is preserved.

As it currently stands, the litigation funding market is not compelled to be authorised or regulated by the FCA and the government has previously indicated it does not see a case for moving away from this approach. Temple Funding, a subsidiary of Temple Legal Protection, is fully authorised and regulated by the FCA. I believe that an unregulated market, together with the costs of lending and a lack of clarity on where funds are coming from, impacts on a lawyer’s ability to ensure client-care best practice.

From talking to law firms, I see some common themes emerging around third-party funding, including: funders who are only looking to fund cases where potential damages are in excess of £1m; legal costs likely to be substantially more than damages, in some cases 10 times more; the use of success fees with multipliers as high as six times the amount being funded; funding facilities provided in a format where the client has to pay interest on the maximum funding amount agreed rather than the actual amount drawn down, which is invariably less than the maximum; and finally, some funders are working with ATE insurance providers and insisting that insurance premiums are payable in advance of the action which means a further amount added to the funding pot, naturally subject to additional interest.

With the vast majority of litigation in the UK being for claims under £1m, these kinds of issues mean that most claimants would either simply not be able to obtain third-party funding or the cost of such funding would be prohibitively high. From a regulatory perspective, in this rapidly growing market, I believe that all funders should go through the FCA authorisation process to give effective protection to solicitors and their clients.

With the current political stance not to enforce regulation, responsible solicitors should only use FCA-authorised funders.

Lastly, on the subject of control of the claim, similar to minority shareholders, there must be a schedule of agreed rights for the funder and ATE insurer to enable them to have their say. It would be part of the litigant/lawyer contract that the litigant concedes some level of control, appropriate to the circumstances, to those funding the action to ensure mutual protection for all parties.

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