Insights

On 2 June 2025, the Civil Justice Council (CJC) published its much-anticipated Final Report, bringing its review of litigation funding to a close. The report recognises that “litigation funding is an essential means of promoting access to justice” and contains 58 broadbrush recommendations for changing the way litigation funding is regulated in England and Wales. This article canvasses a handful of them.

A legislative reversal of PACCAR

The Working Party’s first and most pressing recommendation is to introduce legislation to reverse the effect of the PACCAR decision [1], by clarifying that litigation funding is not a form of damages-based agreement (DBA).

While many expected a recommendation along these lines, its timing sits awkwardly with the Court of Appeal hearing that took place on 10 and 11 June to determine the question of whether litigation funding agreements (LFAs) that calculate the funder’s commission as a multiple of funds drawn (rather than as a percentage of any recovery) ought to be treated as DBAs.

It remains to be seen whether (and how swiftly) the Government will act on this recommendation. In the interim, the protracted fallout from the PACCAR decision continues to consume valuable public (and private) resources and holds the industry in an unnecessary state of flux with respect to funding activities in England.

Baseline regulatory requirements for single-case litigation funding

The Working Party recommends that the current self-regulatory approach be replaced by a formal regulatory scheme for third party litigation funding that is “comprehensive” but also “light touch”. The latter phrase is a bit of a misnomer. If all of the CJC’s recommendations are adopted, you would be hard pressed to find a more sweeping regulatory regime in any other jurisdiction that permits litigation funding.

It is proposed that arbitration would be excluded from the CJC’s proposed regime and would remain subject to the rules of arbitral institutions.

Proposed changes include:

a) the introduction of case-specific capital adequacy requirements for funders;

b) provision for disclosure to the court and other parties to proceedings at the earliest opportunity, of the fact of funding, the identity of the funder, and the ultimate source of funding (the level of detail expected surrounding the source of funds is unclear);

c) codification of the requirement that litigation funders should not “control” funded litigation; and

d) the application of conflict of interest and anti-money laundering requirements.

The requirement for case-specific capital adequacy would seem to be a solution in search of a problem. There is scant evidence of funders failing to meet specific funding obligations for a single case and even if that was to occur, if the case is sound, and the funding market continues to be vibrant, there will generally be another funder willing to step in to continue to meet the need for funding.

Disclosure to the court of the fact of funding and the identity of the funder is relatively uncontroversial. On the one hand, such disclosure can be beneficial to the effective resolution of a case since it signals to the funded party’s opponent that an otherwise disinterested third party has determined that the case has merit, to the extent that it is willing to put its own resources at risk on a non-recourse basis to provide financial support to the funded party. On the other hand, it is difficult to understand the basis for making disclosure a mandatory requirement as opposed to a tactical choice where the funded party is a sophisticated corporate who should be free to make its own financial arrangements without disclosure.

Disclosure of the “ultimate source of funding” may create unnecessary challenges, depending on the level of detail expected to be disclosed. Disclosure of each individual investor in a litigation fund seems unwarranted and is likely to act as a significant dampener on the availability of litigation funding in England and Wales. Investors in third party funding currently invest on the assumption that their investment will remain confidential. There seems to be little justification for requiring the identification of a single investor in what may be a large litigation fund with many cases in its portfolio, particularly where the investor has no involvement in the investment decisions of the fund.

It is unclear what problem this proposal is seeking to solve. Nor is it clear how that information, once disclosed, will be productively used. If a party to the proceedings takes issue with a particular investor, then what? And given the fungibility of money, how might such a party establish that the funds injected by that investor into the litigation fund are the exact same funds that have been deployed in their proceeding? What if the size of that investor’s investment relative to the overall size of the fund is negligible? Might that particular investor’s funds (if they can be identified) be carved out of a well-resourced fund so that it all becomes a non-issue? And will sums invested from blue chip sources – as is the case with the funds managed by most reputable litigation funders – be more or less acceptable than those managed by a litigation fund which sources its capital from a single investor or family office (and against what benchmark would that decision be taken in any event, and by whom)? These questions alone (and there are more) should demonstrate that the proposal is likely to inhibit, rather than promote, funding and will lead to more, rather than fewer, satellite skirmishes.

A more fundamental problem with this recommendation is that the proposed requirements around disclosure place an unequal burden on claimants, in circumstances where it is not proposed that defendants also be required to disclose the source of their funding, or provide details regarding their asset position or any relevant insurance policy.

As far as enforcement is concerned, the Working Party is not currently proposing that the Financial Conduct Authority (FCA) take on the role of regulating third party litigation funders [2], but is recommending that a breach of the regulations renders the LFA unenforceable as against the funded party. This proposal also brings with it the possibility of significant satellite litigation as funded parties may seek to avoid their contractual obligations by alleging, for example, that a funder did not disclose with specific detail the ultimate source of funding, or exerted control over the funded proceedings. If this recommendation for enforcement is implemented, it runs the risk of creating significant uncertainty in the litigation funding market, which will act as a disincentive to funders.

Additional requirements for consumer / collective proceedings

The Working Party has proposed that a layer of additional requirements be imposed where the funded party is a consumer or the proceedings being funded are collective, representative or group proceedings. For example, the Working Party recommends:

a) a requirement that funded parties receive independent legal advice from King’s Counsel before entering into a LFA;

b) a mechanism for court review and approval “on a without-notice basis” of the terms of the LFA, with a particular focus on whether the funder’s return is “fair, just and reasonable”;

c) that “enhanced notice” of the funder’s return be given to class members during the opt-out period; and

d) mandatory cost budgeting and management for collective, representative or group proceedings.

Another notable recommendation is that CPR Part 19 should mirror the CAT Rules with respect to LFAs in collective proceedings, to ensure that class members in funded opt-out collective proceedings and representative actions enjoy the same protections. It is proposed that CPR Part 19 be amended to provide for the approval of funding agreements and settlements. It is also proposed that both CPR Part 19 and the CAT Rules be amended to require that following certification of a funded representative action or an opt-out collective proceeding, the opt-out notice issued to class members informs them of: the identity of the funder; and the funder’s approved return. This sounds good in theory, but the notion of an ‘approved’ return for a funder at certification is illusory, in circumstances where the funder’s return is subject to material change, as Merricks v Mastercard illustrated. It’s easy to envision a situation where a potential class member opts out of the proceedings, on the basis that they perceive the funder’s ‘approved’ return to be too high, only for the funder’s actual return to be reduced significantly by the time a settlement is reached. That class member has prematurely and unnecessarily lost the benefit of participating in those proceedings, and potentially in achieving any redress for a wrong they have suffered.

The Working Party has also recommended the development of standard terms for LFAs, to be annexed to the regulations, as well as the application of the ‘Consumer Duty’ to collective proceedings, representative actions and group actions. The scope of the standard terms, and their implementation, is not detailed. It is also far from obvious how the Consumer Duty will be applied, particularly in the context of opt-out proceedings, and (on a practical level) by whom. By way of example, part of the FCA’s Consumer Duty involves firms identifying and appropriately responding to specific needs of vulnerable customers. This is more straightforward when you know who your customers are. In opt-out proceedings, the class is nebulous, being defined with a set of high-level parameters. All persons who meet the criteria for the class are automatically included in it, unless they actively opt out. In essence, the lawyers acting for the class in opt-out proceedings will not have a comprehensive list of named customers, let alone an understanding of any known vulnerabilities. Recommendation 17 of the Final Report is that the funder, rather than the law firm, should be subject to a regulatory Consumer Duty. How this will work is extremely unclear when third party funders of collective proceedings or group actions are a step removed from the individual consumers, as they are not involved in the day-to-day management of the proceedings and rarely have direct contact with class members.

Changes to the Court rules on costs

The Working Party has recommended some amendments to the rules on security for costs and adverse costs. A significant recommendation is that:

• there ought to be no presumption that security for costs be ordered against a funded party or a litigation funder; and
• security should not be ordered against a funded party or litigation funder where the funder has met its capital adequacy regulatory requirements, and they have an appropriate ATE insurance policy in place.

Among other notable developments, the Working Party considers that litigation funding costs should be recoverable in exceptional circumstances, with the court taking into account the conduct of the parties and the funder; whether the funding costs were reasonably incurred; and whether the proceedings could have been pursued by the receiving party without incurring the funding costs.

If implemented, this would represent a welcome development for claimants and may further incentivise defendants to seek a cost-effective resolution of meritorious and funded claims, including via settlement.

Funders’ returns

The Working Party has rejected the imposition of any cap on funder returns, instead leaving any assessment of the reasonableness of funder returns to be made on a case-by-case basis by the courts in collective, representative or group proceedings. This approach preserves the freedom of sophisticated parties to negotiate and agree on commercial terms without interference, while recognising that where consumer protection is desirable, the court or tribunal will be best placed to consider the reasonableness of those terms in all the relevant circumstances.
It is encouraging that the Working Party has proposed the establishment of a Standing Committee on Litigation Funding to collect data on (among other things) the nature of the funded claim and funded party, legal costs and funder returns. Assessments of funder returns have so far been made in the absence of comprehensive industry data, and frequently without due consideration of the nature of funder risk.

Portfolio funding

The intersection between law and finance has driven debate about who should be responsible for regulating the provision of portfolio or law firm financing, with some championing self-regulation, and others proposing regulation by the FCA or Solicitors Regulation Authority (SRA). Recommendations 28 to 31 address this quandary. In its Final Report, the Working Party recommends that:

• the FCA regulate “portfolio funding” as a form of loan (this appears to refer to financing offered to law firms, rather than corporates, in respect of a portfolio of cases but further clarification on the definition of “portfolio funding” would be welcome) [3];
• the SRA consider the need for greater cooperation (and potentially co-regulation) with the FCA on this issue;
• the SRA assess whether there is effective guidance for lawyers regarding the use of portfolio funding; and
• the Government consider whether regulatory reform of the legal profession is necessary.

The Final Report suggests that one of the reasons for this set of recommendations is the concern that law firms “have, through securing portfolio funding, developed high-risk and unstable business models that depend on unrealistically high levels of return.” [4] Examples are given of law firms that obtained portfolio funding to work on a contingency basis and subsequently collapsed, resulting in clients having their claims discontinued and absorbing liability for adverse costs. The need to prevent harm to consumers of legal services is clear justification for recommendations relating to SRA involvement, but does not explain why each instance of portfolio funding provided by a litigation fund to a law firm should be regulated.

Where a law firm is acting on a contingent basis, it is effectively the law firm that is providing credit to their clients, and it is arguably that lending relationship which ought to be the focus of scrutiny, rather than the individual sources of financing provided to the law firm. Law firms themselves are sophisticated corporate users of various forms of financing and most will obtain capital from multiple sources. To provide an example, a litigation fund may provide a law firm with funding relating to two specific cases, in respect of which considerable due diligence has been undertaken to test the merit of both cases. That type of funding would be subject to proposed FCA regulation, despite the fact that the arrangement: (i) may account for a negligible component of the law firm’s balance sheet; and (ii) is an entirely different proposition from law firms which operate under a high-volume business model of taking on as many consumer claims as possible. The risks attaching to any one firm’s business model and balance sheet must be considered holistically, and are more appropriately assessed at the law firm level.

Concluding remarks

While the Final Report contains several recommendations that are clearly sensible and will promote access to justice (such the immediate reversal of PACCAR), there are others that have the potential to create significant uncertainty and do not appear to have been comprehensively considered, at this stage. There clearly remains a lot of work to be done to determine the regulatory position on third party funding in England and Wales. It remains to be seen whether the Government will accept all 58 recommendations, how it will implement those that are adopted and where the overall project of regulatory reform in this industry will sit on its to-do list. If all recommendations are translated into detailed legislation, as well as amendments to court rules and the FCA’s purview, the courts of England and Wales will inevitably become a less attractive forum for claimants to bring funded disputes. Corporate users of disputes finance may well prefer to resolve their disputes via arbitration or otherwise give greater consideration to court systems in jurisdictions further afield.

Footnotes