Civil Justice Council's final report on litigation funding recommends "light touch" statutory regulation

The Civil Justice Council (CJC) yesterday published its final report in its review of litigation funding, which comprehensively addresses the issues identified in its interim report published last October (see our blog post here).

The review was set up in April 2024 in the light of the Supreme Court's decision in Paccar in July 2023, which established that litigation funding agreements based on a share of damages are Damages-Based Agreements (or DBAs) and are therefore unenforceable unless they comply with the restrictive regulatory regime for such agreements under the 2013 DBA Regulations (see our blog post here).

The key recommendations from the CJC's report are as follows:

• Legislation should be introduced as soon as possible to reverse the effect of Paccar, with retrospective effect, so that litigation funding agreements will be enforceable regardless of whether they provide for the funder to receive a percentage share of damages and whether they comply with the DBA Regulations.
• A new system of "light-touch" statutory regulation should be implemented for litigation funding through Regulations issued by the Lord Chancellor. This should not apply to the funding of arbitration proceedings. Regulation by the FCA is not recommended at this stage, but that should be revisited after five years.
• There should be a base-line set of requirements for all litigation funding, including for example capital adequacy requirements, restrictions on funders controlling litigation, and disclosure of the fact and source (but not the terms) of funding.
• Additional requirements should apply to funding for consumers and class actions, including, for example, a requirement for independent legal advice and court approval of funding agreements. Interestingly, the funder and legal representative would have to certify that they did not approach the funded party directly or indirectly in respect of the claim – ie that pursuit of the claim was initiated by the funded party and not the funder or legal representative.
• There should be no cap on the amount litigation funders can receive as a return from the litigation.
• Litigation funding costs should be recoverable in litigation in exceptional circumstances.
• The current legislation relating to contingency fee agreements provided by lawyers, ie Conditional Fee Agreements (CFAs) and DBAs, should be replaced by a single, simplified legislative contingency fee regime.

The above recommendations are addressed in more detail below.

There are various other recommendations, including to: consider steps to increase the availability and use of regulatory or consumer redress schemes; establish a Standing Committee on Litigation Funding to collect data on the operation of litigation funding, CFAs and DBAs; regulate portfolio funding as a form of loan regulated by the FCA and consider investigating its impact on the legal profession; consider the development of a pre-action protocol for mass claims; and introduce mandatory costs budgeting for all funded class actions.

Reversal of Paccar

The Supreme Court's decision in Paccar in July 2023 came as a surprise to most participants in the litigation funding market, who had generally assumed that their litigation funding agreements were not DBAs and therefore did not need to comply with the DBA regulations. The effect of the decision was to render most UK litigation funding agreements in existence at the time unenforceable.

Funders acted quickly to renegotiate their funding agreements to try to get round the decision, in particular by providing for the funder to receive a multiple of committed or deployed funding rather than a percentage share of damages. The effectiveness of those arrangements was confirmed by the Competition Appeal Tribunal (see for example this blog post) but the point is due to be tested in an appeal to the Court of Appeal this month.

Legislation was introduced to Parliament in early 2024 that would have reversed the effect of Paccar, but the relevant Bill fell in the pre-election wash-up (see this blog post). Shortly after being elected, the Labour government made it clear that it did not intend to re-introduce legislation on the issue until after the CJC had completed its review into the sector.

The ball is now in the government's court to decide whether to implement the CJC's recommendation that legislation should be introduced to reverse Paccar with retrospective effect by making it clear that litigation funding is not a form of DBA, and that it is distinct from funding by legal representatives and from claims management services.

Regulatory framework for litigation funding

The CJC report recommends that litigation funding should be subject to a comprehensive legislative regulatory scheme, to replace the current self-regulatory approach via membership of the Association of Litigation Funders of England and Wales (ALF) and its Code of Conduct for Litigation Funders. The funding of arbitration proceedings would not be subject to formal regulation.

The scheme would draw a principled distinction between the regulation of funding by legal representatives (via DBAs or CFAs) and funding by non-lawyers (ie litigation funding). The scheme set up for litigation funding would also address the regulation of claims management services.

The Lord Chancellor would be given the statutory power and responsibility for effecting regulation through statutory instrument. Regulation by the FCA is not recommended at this stage, but the report suggests that this should be reviewed five years after the statutory scheme is set up.

The CJC recommends certain provisions that would apply to all litigation funders, with additional requirements for the funding of class actions or consumer claims. Breach of the Regulations would render a funding agreement unenforceable, but the court would be given the power to waive breaches where it is just and reasonable to do so.

Regulatory requirements for all cases

The requirements that would apply in all cases include the following:

Capital adequacy requirements: The litigation funder would be required to maintain a sufficient level of capital adequacy to enable it to meet financial obligations that may arise under or consequent to a given funding agreement. The level of capital adequacy required would be determined on a case-specific basis, with the litigation funder and the funded party's legal representative certifying that the funder maintains sufficient capital adequacy. In class actions and consumer claims (see below) there would also be a need for After The Event (ATE) insurance with robust anti-avoidance endorsements. Security for costs would not be available where the funder had complied with capital adequacy requirements and had in place a suitable ATE policy.

Prohibition on control of litigation: The Regulations would codify the current prohibition (in the ALF Code and in case law) on litigation funders controlling funded litigation, whether directly or indirectly and including settlements.

Disclosure of fact and source of funding: The fact of funding, the name of the litigation funder and the ultimate source of the funding would have to be disclosed to the court and the other parties to proceedings at the earliest opportunity after a funding agreement was entered into.

Conflicts of interest: Provision should be made for the prohibition and resolution of conflicts of interest, with reference to Principle Six of the European Law Institute principles on third party litigation funding (outlined in our blog post here).

Additional requirements for funding class actions and consumer claims

Certain additional requirements would apply where the funded party is a party to collective proceedings, a representative action or a group action, or is a consumer. These include the following:

Consumer Duty: The funder would have to comply with a Consumer Duty based on the FCA's Consumer Duty, which would include a requirement to provide the recipient of funding with advance information in clear, simple and transparent terms about the nature of the funding, its benefit to the funded party, and the risks involved.

Independent legal advice: There would be a requirement for the funded party to receive independent legal advice from a KC, at the funder's expense, on the terms of the proposed funding agreement.

Disclosure of funding terms: The funding agreement would be disclosed to the court at the commencement of proceedings, without notice to the opponent and subject to appropriate redaction to protect privileged or commercially sensitive information. The court would then consider whether to approve the funding arrangements, including considering whether the funder's return is fair, just and reasonable.

Funded party sought the funding and representation: The funder and legal representative would have to certify to the court that they did not approach the funded party, either directly or indirectly, in respect of the claim – in other words that the party sought funding and representation for the claim, rather than the funder or legal representative seeking a party for litigation that they themselves sought to pursue.

ATE insurance: ATE insurance with robust anti-avoidance endorsements should be in place to provide protection for other parties to the proceedings.

Funder's return not capped

As noted above, where funding is provided for class actions or consumer claims, the court would be asked to approve the funding agreement, on a without notice application, and this would include consideration of whether the funder's return is fair, just and reasonable.

However, the CJC report rejects the suggestion that any cap should be introduced on the funder's return, describing a cap as a "blunt instrument" which cannot take proper account of the variable risks of funding different claims. The report says that a cap is unnecessary to secure effective consumer protection.

The report does, however, recommend that the legal services regulators be required to improve the regulation of the legal profession where funding is concerned, including introducing 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 also be declared.

The report also expresses concern about issues raised regarding the ability of representative parties in collective proceedings to negotiate the terms of funding agreements effectively, and suggests (but does not recommend) that this issue is something the government should consider as part of the proposed five-year review of litigation funding.

Recoverability of litigation funding costs

The CJC report notes that there is some precedent for the recovery of litigation funding costs in arbitration proceedings (see our blog posts here and here), and says that it is difficult to see an obvious or principled reason for this divergence.

The report recommends that litigation funding costs should be brought within the scope of the court’s wide discretion to make costs orders, expressing the view that this would likely promote both access to justice and earlier settlement, and would allow the courts to ensure a fairer allocation of financial burdens between the parties. The discretion should, however, only be exercised in "exceptional cases", taking into account factors such as the defendant’s conduct, the claimant’s financial position, and the necessity of litigation funding in the case.

This recommendation may be seen as surprising, in circumstances where CFA success fees and ATE insurance premiums have not been recoverable since the implementation of the Jackson reforms in 2013, and the report dismisses the idea of reintroducing some form of recoverability in that context.

Contingency fee agreements

The report sets out a number of recommendations for the reform of CFAs and DBAs, including replacing the current legislation with a single, simplified legislative contingency fee regime. It says this regime could maintain the current distinction between CFAs and DBAs or could replace them with a single contingency fee agreement regime, but either approach should be accompanied by the development of clear guidance and template contingency fee agreements.

The report also recommends the reform of the current, much-criticised DBA Regulations as a matter of urgency, to permit greater flexibility in their application.

A lifting of the current ban on the use of DBAs in opt-out collective proceedings in the Competition Appeal Tribunal is also recommended, together with the removal of any cap on the lawyer's return for both CFAs and DBAs where used in opt-out collective proceedings or by commercial parties.