Vos: More transparent, fair and effective framework for funding
The Civil Justice Council (CJC) working party on litigation funding today recommended the introduction of “light-touch regulation” through legislation.
It also said the effects of the Supreme Court’s 2023 PACCAR ruling – which sparked the upheaval that led to the government commissioning the review – should be reversed as soon as possible.
Among the other headlines from the 150-page report are that the working party rejected a cap on funders’ returns, backed hybrid damages-based agreements (DBAs) and resuscitated the long-running idea of a contingency legal aid fund, here called the Access to Justice Fund.
CJC chair Sir Geoffrey Vos, the Master of the Rolls, said: “I believe that the recommendations in this report, if adopted, will form the foundation for a more transparent, fair and effective litigation funding framework in England and Wales.”
The working party, co-chaired by Mr Justice Simon Picken and barrister Dr John Sorabji, received 84 responses to the consultation it issued last year and was particularly influenced by the European Law Institute’s principles governing the third-party funding of litigation, also published last year.
The report said litigation funding “should continue to develop as an essential part of the overall litigation funding landscape”, but there needed to be “appropriate and effective protection for funded parties and defendants”.
The first step should be to reverse PACCAR by legislation, which should be “both retrospective and prospective in effect”, as soon as possible.
The law should make clear that there is “a categorical difference” between contingency fee funding by lawyers through DBAs and conditional fee agreements (CFAs), and litigation funding. “The two are separate and should be subject to separate regulatory regimes,” the working party said.
There was a bill going through Parliament to reverse PACCAR last year but it fell when the election was called. The new government decided not to reintroduce it pending the outcome of the CJC review.
The working party said this should be followed by a litigation funding bill introducing a baseline level of regulation, with enhanced provisions where the client is a consumer or it is a group action of whatever kind. Arbitration proceedings would be excluded from its scope.
It conceded there was “a great deal of force” in calls for FCA regulation, including that litigation funding was a financial service and that the FCA imposes a consumer duty.
“Ultimately, it may be necessary and appropriate for it to do so. The working party has, however, concluded that in the first instance a lighter-touch approach, and one consistent with both Parliament’s original intention for the regulation of litigation funding and the current approach to the regulation of CFAs and DBAs should be adopted.
“Consequently, it recommends that the Lord Chancellor regulate litigation funding through being responsible for issuing regulations prescribing the terms on which it can be carried out as a regulated activity.
“Such an approach will provide an effective level of independent and impartial regulation. It will do so at low cost. It will also do so, through the nature of the regulatory requirements, by ensuring the benefits that would otherwise flow from FCA regulation are secured.”
A review after five years – conducted by the government in conjunction with a new standing committee on litigation funding, which the report said should be part of the Civil Procedure Rule Committee – should consider whether FCA regulation has become necessary.
Under the blueprint, no litigation funding agreement (LFA) would be enforceable unless it complied with regulations that required the funder to maintain “a sufficient level of capital adequacy”, to be determined on a case-specific basis.
The litigation funder and the funded party’s lawyer would have to jointly certify this to the court and any other party to the litigation, as well as – in consumer and party proceedings – that after-the-event insurance with “robust” anti-avoidance endorsements was in place.
The fact of litigation funding, the name of the funder and the ultimate source of the funding, should be disclosed to the court and other parties at the earliest opportunity, but not the terms. “Certification requirements obviate any justification for such disclosure.”
A lawyer breaching the certification requirements should face disciplinary action by their regulator, while failure to comply with either the capital adequacy or ATE requirements should result in the funder having to give security for costs.
“In the event that that is not possible, the LFA should be unenforceable as against the funded party, and should render the funder liable for the funded party’s costs and for adverse costs. The court or CAT [Competition Appeal Tribunal] should also give directions to, for instance, decertify any collective proceeding, stay them or, if appropriate, strike them out.”
The regulations should also: ensure the litigation funder has complied with anti-money laundering rules; prohibit funder control of the litigation, including settlements; prohibit conflicts of interest; and establish an independent, binding process to deal with disputes between funder and client.
The court should be able to waive an inadvertent breach of the regulations where “just and reasonable to do so on such terms as it considers fair and reasonable”.
Where the funded party is a consumer or it is a group action, the funder should also have to comply with a regulatory consumer duty, modelled on the FCA’s, while the party should receive independent legal advice from a KC, paid for by the funder, before entering into the LFA.
To minimise the cost of such advice, standard LFA terms should be developed and annexed to the regulations.
Further, the funded party, on a without-notice basis, should disclose the LFA for approval by the court at the outset of proceedings.
“In considering the funder’s return, the court should have the power to take an inquisitorial role in order to ensure that it can properly consider and protect the funded party and any absent class’s interests.”
As part of this, the funder and lawyer would have to certify that they did not approach the client, either directly or indirectly, in respect of the claim.
The working party said non-compliance with the regulatory requirements should be notified to the standing committee, which in turn should report annually to the Lord Chancellor. The minister could then amend the regulations as needed, including prohibiting a particular funder from providing funding in future.
The report rejected the imposition of statutory caps on funders’ returns “on the basis that they are a blunt instrument and are unable to take proper account of the variable risks of funding different claims”.
It continued: “They are also unnecessary as a means to secure effective consumer protection. Such protection, for non-commercial parties and for claimants or class members in collective or party proceedings, is, however, provided by making provision for the court to approve that the level of return is fair, just and reasonable.”
The working party also called on legal regulators to improve the regulation of the legal profession where funding is concerned.
“Specific, regulatory requirements and guidance should be provided to the legal profession. These should include specific requirements to consider with their clients the various available forms of funding, their advantages and drawbacks.
“Disclosure of any connection between the lawyer, law firm and funder should be declared.”
While, generally, the civil courts and the CAT already have sufficient costs and case management powers to manage funded litigation effectively, the report said they should be given the power, on application, to manage the pre-action phase of funded litigation, and also be required to consider whether there were consumer or regulatory redress schemes available to resolve proposed group actions.
Other recommendations include:
- All forms of crowdfunding litigation should be regulated, but with a different regime where the funders do not receive a return;
- The possible development of a pre-action protocol for mass claims;
- Making costs budgeting mandatory for all funded group actions;
- Only specially authorised (ticketed) judges should, as a general rule, be allocated to manage funded claims;
- Litigation funding costs should be recoverable in exceptional circumstances;
- The current CFA and DBA legislation should be replaced by a single, simplified legislative contingency fee regime;
- Responsibility for CFAs, DBAs or any new single contingency fee regulations should be transferred from the Ministry of Justice to the rule committee;
- Legislation should clarify that hybrid funding arrangements are lawful, with the 2019 Mulheron-Bacon reform proposals implemented;
- DBAs should be permitted in opt-out collective proceedings in the CAT;
- The government should promote the uptake, utility and use of legal expenses insurance; and
- The government should consider whether to introduce an Access to Justice Fund, “a new and supplemental aspect of civil legal funding” funded by a small percentage of the profits from litigation funding, CFAs and DBAs. It would back early legal advice and alternative forms of dispute resolution.
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