Formal regulation – a price worth paying for third-party funders

Deadman: only a matter of time before a ‘rogue’ operation enters the market

Posted by Chris Deadman, director of operations at Litigation Futures Associate Invicta Capital Funding

The comments by Lord Faulks QC last week that third-party litigation funding is “in danger of undermining the integrity of our much-admired legal system”, has been met with predictable howls of derision by those involved in the industry.

The issue of statutory regulation or licensing has been on the agenda for a while but the creation of the Association of Litigation Funders (ALF), with its voluntary code of conduct has gone some way to persuading the Ministry of Justice (before the election, at least) that this is not necessary for the time being.

Lord Faulks has expressed concern that the derisory penalties imposed by ALF on errant funders and the relative lack of sign-up by existing funders points strongly towards the need for statutory regulation.

The reason why some funders have chosen to eschew ALF is that there is a perception (wrong in my view) that the quality mark afforded by ALF membership is of limited value. Their failure to register is not due to the fact that they are engaged in shady business practices but rather that they don’t see ALF membership as conferring any benefits in the way that, for example, ABI membership does for the insurance industry. That’s not the fault of ALF – it’s just at the moment there is no compelling reason for some funders to sign up.

But I would argue that Lord Faulks QC is wrong when he says that the increase in the prevalence of third-party funding is in danger of undermining our justice system. There is simply no evidence to support that view. A funder’s litigation deed is carefully drafted to ensure that the basis of their involvement is clear to all parties and that there is no opportunity for the funder to exert control over the conduct of the matter in which they have invested.

Lord Faulks talks sniffily about funders concerning themselves with matters of profit rather than justice. Funders are absolutely concerned with investing in suitable matters in order to make a profit and there is nothing wrong with that. It is called capitalism and until we identify an alternative model, it is the system we have to work with.

Indeed, I have never been in the financial position to retain the services of Lord Faulks QC, but I daresay his fee notes also contain an element of profit.

Third-party funding continues to be an attractive vehicle for investors’ cash and it is only a matter of time before a ‘rogue’ operation enters the market. If we in the industry want it to flourish and become a mainstream option for clients wishing to defray the cost of litigation, then we should accept statutory regulation or some species of licensing as inevitable and to be welcomed.

External scrutiny will inevitably add costs to our business but the credibility it will give us will far outweigh the administrative downside.


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