CILEX backs stronger regulation of third-party litigation funding

Third-party funding (TPF) of litigation is vital in promoting access to justice and achieving equality of arms but, according to CILEX, it requires a comprehensive regulatory framework.

“Proper regulation – rather than the current self-regulatory regime – would both protect claimants from under-settlements and ensure the justice system is not viewed simply as a business venture,” CILEX said.

Its response to the Civil Justice Council’s review of TPF did not specify what form regulation should take but observed that mandating a strengthened version of the Association of Litigation Funders’ existing code of conduct would be easier than, for example, amending the Civil Procedure Rules. This would also be more flexible.

Furthermore, CILEX argued it should be for the judiciary to establish whether funders are exercising excessive control over litigation proceedings, supported by mandating the disclosure of funding agreements.

It recommended the process used in protected party proceedings, where the judge has to seal agreed orders created by the legal representatives for settlement, as more time-efficient than something akin to infant settlement hearings.

The response stressed the need to prevent funders financing high-risk claims with lower merits and instead put the focus on supporting the broader interests of justice. There may be a case also for incentivising public interest litigation via tax benefits for funders.

The risk of under-settlement is currently managed by the regulation of lawyers, but CILEX said “this is not a guaranteed protection, especially where vulnerable claimants are facing financial pressures and fear losing the funding for their claim”. There needs to be “clear and consistent regulation on settlement provisions for funders” to avoid this.

CILEX said that formally regulating funding practices would reduce litigation costs. “As an example, mandating transparency and accountability in funding agreements through disclosure would provide clearer understanding of the total financial costs associated with the type of dispute or litigation. This helps create better informed decisions surrounding the overall costs and the risks associated with litigation.”

The underlying principles of regulation should be transparency, independence, conflict of interest management, prioritising the best interests of the funded party, and keeping costs reasonable, proportionate and fair.

This would also support making the costs associated with litigation funding recoverable with other litigation costs for successful parties.

Simon Garrod, CILEX director of policy and public affairs, said: “Third-party funding was introduced to England and Wales to improve access to justice and it has achieved that in many cases, most famously the Post Office litigation. However, it touches so directly on the justice system that a more robust regulatory regime is needed to protect the interests of clients over those of funders and others who benefit from their money.

“Ultimately, it will be for the government to act on the final report and we will be encouraging ministers to do just that.”

CILEX also considered that before-the-event insurance could be reformed to offer broader and more comprehensive coverage, including more choice of legal representative (e.g., by setting out criteria rather than mandating a particular firm). It opposed a mandatory legal expenses insurance scheme and thought that crowdfunding for litigation should be subject to regulatory standards, like the Association of Litigation Funders’ code of conduct.