FCA: Time to take on litigation funding?
A right-wing think tank has called for the Financial Conduct Authority (FCA) to regulate third-party litigation funding (TPLF) in the same way “as other investment products”.
The Adam Smith Institute also urged “a blanket requirement of transparency” for TPLF-backed class actions.
It said the combination of class action expansion and the proliferation of TPLF “creates a legal environment in which consumer protection cases benefit litigation funders and claimant law firms, rather than negatively affected consumers, undermining trust in the UK’s legal system for businesses and individuals alike”.
The report, Judge Dread: How lawfare undermines business confidence in the UK, is selective in how it deploys its evidence, however.
For instance, while it cited with concern the fact that the funder backing the Bates Post Office litigation took 80% of the damages, it did not mention that Sir Alan Bates himself has said the arrangement “worked very well for us” and enabled sub-postmasters to bring their claim.
The report also reflects a growing political argument over TPLF, with lobbying by big business – led by the Fair Civil Justice campaign, which is backed by the US Chamber of Commerce – seeking to curb it.
The media platform openDemocracy ranks the Adam Smith Institute as among the least transparent think tanks in terms of its funding.
Meanwhile, writing yesterday in The Times, Alex Chalk KC – who was Conservative Lord Chancellor until the election – described TPLF as “a force for good that is backing attempts to secure people’s basic rights, supporting five equal pay claims for more than 100,000 women, holding water companies to account for overcharging consumers, and challenging BT for overcharging millions of customers”.
He used his article to criticise Labour for not reintroducing the Litigation Funding Agreements (Enforceability) Bill that did not make it through Parliament before the election was called. The government has said it will now wait for the Civil Justice Council to complete its review of funding next year – although the interim report due this summer has still not been published.
The Adam Smith Institute report argued that “one of the clearest causes” for suboptimal business confidence in the UK was “the remarkable rise of class action cases in recent years”, and particularly since the Consumer Rights Act 2015 introduced opt-out collective actions in competition cases.
This rise was “in part” the result of “greater political and judicial openness to mass claims, itself the result of changing normative perspectives on consumer protection”.
This was coupled with “a booming litigation funding market”, allowing funders and claimant law firms to work together “to pursue novel claims which would previously not have been economically feasible”.
While class actions were “not per se a harmful feature of our legal system”, their rapid expansion has resulted in “far greater business liability than before”, the report went on.
“Mass claims are now affecting almost every sector of the UK economy, and claimant firms are continuing to establish innovative case theories to impose liability on new areas.”
Arguing that the current situation would discourage investment in the UK, it said “decisive action is now needed to curb the rise of class action cases, and the expansion of third-party litigation funding, to ensure that companies and UK plc are insulated from the worst excesses of ‘lawfare’”.
The institute argued that claimant law firms and litigation funders were “the biggest beneficiaries of the UK’s class action boom”.
It said: “The procedural changes introduced since 2015 have been responsible for incubating a new and lucrative relationship of symbiosis between these two groups.”
The report also criticised the lack of requirement for litigation funders to disclose the ultimate source of their funds, which gave “significant scope for foreign investors to benefit from the recent surge in class actions”.
Large foreign shareholdings in TPLF, particularly by national governments, sovereign wealth funds or businesses in which a national government was a large stakeholder, “should be prohibited altogether, in order to prevent the most obvious cases of foreign influence in the UK legal system”.
At the same time, anti-money laundering policies should be strengthened in regard to foreign TPLF.
The report said TPLF meant there was “little risk for claimants and claimant law firms in advancing non-meritorious claims” with a view to forcing defendants into settling – although did not recognise the financial risk if this did not happen.
The “most pressing area of concern” was the lack of regulatory oversight. “Regardless of one’s position on the value of the FCA’s current remit, it is unquestionably the case that regulations should be applied evenly and consistently to sectors with sufficiently similar characteristics.”
Further, courts should be given a greater role in scrutinising litigation funding agreements, “supported by a blanket requirement of basic disclosure”.
It continued: “The regulator should also consider introducing provisions which address potential conflicts of interest between litigant funders, lawyers, and claimants. In particular, litigation funders should be prohibited from directing litigation strategy, while law firm employees should be prohibited from acting as directors of TPLF.”
The institute also suggested that the government consider extending legal aid, which it described as “a preferable alternative to TPLF, particularly for class action cases”.
While it should be “sufficiently restrained as to prevent abuse, a well-delivered system of legal aid can help to ensure expanded access to justice on reasonable terms”.
With 119 criminal defence law firms threatening to quit legal aid over a lack of funding, this seems an unlikely prospect, however.
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