Litigation funding supports the public interest, major research finds

Mulheron: Funding supports the regulatory objectives

Litigation funding supports the public interest and access to justice but will remain niche in aiding consumers, according to major research which identified 44 cases in the last five years.

It also highlighted a risk of litigation funding being used for economic crime – where it is difficult for law firms to know the ultimate source of funds used by their litigation funder – but suggested this risk was currently more theoretical than real.

The Legal Services Board (LSB) commissioned Professor Rachael Mulheron KC (Hon) of Queen Mary University in London, the leading academic in the field, to conduct a rapid literature review and empirical study on the nature of litigation funding from a consumer perspective, and consider litigation funding as it relates to the LSB’s regulatory objectives, as set out in the Legal Services Act 2007.

Between 2019 and 2024, there were 44 consumer cases involving litigation funding, mostly collective actions in the Competition Appeal Tribunal (CAT) or group actions in the High Court.

“By virtue of being able to fund litigation which would, otherwise, not be capable of being funded, litigation funding serves a public interest,” the 197-page report said, citing the first regulatory objective.

Though litigation funding was not for many cases – due to “the economics of funding, and the screening or filtering mechanisms applied – “the entirety of the collective proceedings in the CAT, as well as significant collective actions and commercial litigation” bore testament to its ability to improve access to justice, the second objective.

At the same time, the reality was that the ultimate economics of a case “may dictate a less-than-favourable outcome for the funded client”, such as smaller than expected or even inadequate compensation.

The CAT cases showed how funding supported the objective of protecting and promoting the interests of consumers, but “the ‘upward scaleability’ of litigation funding, so as to capture a greater tranche of consumer cases, is not presently visible, given the metrics of those cases (e.g., merits, quantum, risk profile) which generally appeal to litigation funders”. Funders only took on around 3-5% of opportunities.

When it came to the objective of promoting competition in legal services, many law firms and clients were willing and able to engage with funders that were not members of the Association of Litigation Funders (ALF), the voluntary self-regulatory body (which has to date only received four complaints, the report revealed).

“There is no suggestion of a ‘closed shop’ arrangement existing as between litigation funders and law firms; quite the reverse, in the current funding market.

“Moreover, there have been suggestions from within the industry that the capital adequacy thresholds – both capital available and cash fluidity – should not be cast too highly, in case that should deter new entrants to the ALF.

“However, by the same token, it has been suggested that compulsory membership of the ALF, and then requiring law firms to deal only with ALF funder members, could be anti-competitive.”

Funding supported the legal profession by ensuring lawyers were paid, while the high-profile nature of some of the cases it has backed – for sub-postmasters, Uber drivers and supermarket workers, for example – gave people an “enhanced appreciation” of their rights, two further objectives.

Promoting the prevention and detection of economic crime is a new regulatory objective added by the government last year and Professor Mulheron wrote that “the extent to which some funding may be derived, whether directly or indirectly, from unlawful, illegal or terrorist sources, cannot be ignored”.

This was particularly so in respect of foreign litigation funders that were not ALF members and did not have a track record in England.

The Solicitors Regulation Authority provided no guidance to law firms on the anti-money laundering or ‘know your client’ checks that should be done with respect to funders, the report said, but “law firms are very alive to the risk of breaching anti-money laundering laws” and carried out such checks on funders.

“However, there has never been any allegation or finding, in respect of any litigation funder practising in England, that their sources of funding have been sourced to capital derived from unlawful means. Hence, this concern may (presently) be more theoretical than real.”

The report also found that if the Litigation Funding Agreements (Enforceability) Bill 2024 is passed – and that will need to be next week given the general election called yesterday – “litigation funding is likely to develop further as a niche, but vitally important, feature of legal services provision”.

Richard Orpin, interim LSB chief executive, said: “This comprehensive study makes clear that litigation funding is a niche market that supports a small fraction of cases, and while it makes an important contribution, it alone cannot address the significant access to justice gap.

“These insights will inform our work exploring the role that legal services regulation may play in enhancing access to justice, and will also be of interest to policy makers elsewhere. We have shared the findings with the Civil Justice Council to consider as evidence as part of its review of litigation funding.”

Shrutika Gandhi, a doctoral student with the Institute of Advanced Legal Studies, worked with Professor Mulheron on the project.

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