Making the case to regulate third-party funding – badly


Posted by Neil Rose, Editor, Litigation Futures

Over-litigated and over here

Over-litigated and over here

The US Chamber of Commerce, scarred by the American litigation culture, has long been spreading the word about the pain that litigation can cause, and has a particular bee in its bonnet about third-party litigation funding (TPLF).

So much so, in fact, that it has been busy lobbying in the UK for some years to try and bring what it considers the wild west of the UK’s unregulated TPLF market to heel. In answer to the regular question about why it is ‘interfering’ with UK policy, the chamber argues that many of its members have operations over here too.

Yesterday the chamber’s work was given fresh impetus with its ‘Justice not Profit’ campaign, supported by a public opinion poll and a market analysis, and launched to a handful of journalists at the swanky HQ of its PR company just off The Mall in London.

At the moment, from what I can tell, UK-based funders are mainly interested in big companies that are suing each other and want/need several million pounds to finance it. And most of this is happening in the US courts and in international arbitrations anyway.

A few ‘David v Goliath’ cases are being funded as well, while in the last two years there has been some focus on smaller disputes (where funding in six figures is the norm) for SMEs and also some individuals in areas such as probate – everyone steers clear of injury cases, whatever the size. The next big thing, potentially, is next month’s introduction of opt-out group actions under the Consumer Rights Act 2015.

Of the two main elements of the chamber’s case, by far the weakest was its consumer survey. It started by seeking out the views of 1,261 people on the decline of the civil justice system generally; their responses can be captured in the phrase ‘compensation culture’ (a notion, it should always be remembered, that even various government reports have acknowledged is perception rather than reality).

Worked up by this – to judge by the results, most people were not feeling positive about civil litigation by this point – they were then moved on to TPLF.

Of course, you could ask 100,000 people and hardly any of them would know what it was, so the lucky punters had it explained to them in these terms (which the researchers said had been provided by the chamber):

“[TPLF] is where financial firms (for example, hedge funds and private investment firms) that have no direct connection to a legal dispute invest in the case. These firms identify cases where there is likely to be a large settlement and pay the associated legal and administrative fees on behalf of the claimants. The third party litigation industry in the UK is growing.

“If the case is successful, the financial firm funding the case claims a significant share of the financial settlement awarded to the claimants (generally 30%-40% of the settlement). If the case is unsuccessful, the funder and the claimants get nothing.”

To me, this is an unbalanced definition – no mention, for example, of the fact that the existence of a funder means that a successful defendant will be able to recover its costs, or that it’s not just about cases that settle, or that TPLF may allow a party to bring a case when otherwise they wouldn’t have been able to (although in fairness, views on that were sought in the next question). So the fact that most of the respondents reacted negatively to TPLF is no surprise.

So we can discard this no doubt expensively assembled but meaningless survey. Frankly, at this stage of TPLF’s development, who cares what the public thinks when making a snap judgement on something they’ve never heard of before? The only possible relevance is in considering the reputation of a justice system that is tarred with the ‘compensation culture’ brush. But it doesn’t go to the real issues around TPLF.

I found the market analysis of more interest. It was limited to publicly available information about an industry where transparency is not the watchword outside of the listed companies and Augusta Ventures, which puts details on its website and even has a wall in its office which displays tombstones for each case, with the name of the law firm, the type of case and amount of investment.

Further, the estimate of the amount of capital invested in litigation does not make clear that most of it has gone overseas. There was little also on the safeguards in the Consumer Rights Act that aim to stop opt-out group actions following the path of such cases in the US.

But it did point out troubling issues that have arisen in recent times, such as the Excalibur ruling, the allegations swirling around funder Argentum Capital, and the low profile and minimal teeth of the voluntary Association of Litigation Funders (from which Argentum resigned). This was not an argument against TPLF in its totality – although I suspect that is where the chamber would like to end up – but an argument in favour of regulation.

It’s fair to recount that, as diplomatic cables might put it, I enjoyed a lively exchange of views with representatives of the chamber because of these shortcomings. After all, the press release began: “The unregulated funding of litigation by financial speculators must come to an immediate end and instead be governed by an independent watchdog, according to an overwhelming majority of the British public.”

This is absurdly overblown, and of course you do have to be sceptical of the chamber’s motives more generally – unsurprisingly, big companies don’t like being sued by claimants with financial backing.

At the same time, there is no doubt that the TPLF market is growing and more UK litigation is being financed. There is little or no evidence of real harm to date and the question is, therefore, whether we should wait for something to go wrong – which might not happen, of course – or pre-empt that possibility now, bearing in mind Lord Justice Jackson’s recommendation that statutory regulation be revisited when the market was no longer nascent, as it was when he looked at it in 2009.

One of the problems is who would regulate funders – the Financial Conduct Authority is the obvious choice but its knowledge of, and interest in, TPLF is likely to be minimal; it has more than enough to do already.

On balance I don’t think we’re yet at the stage where regulation needs to be on the agenda again. But the closer TPLF gets to consumers, the stronger the case will become.




    Readers Comments

  • JJack says:

    I’m inclined to agree that the poll looks like an expensive waste of time. Small sample size, tricky questions, and misleading results. The market report looks much more interesting I think. Stats need beefing up, but I guess getting financial data from someone you’re trying to shut down is a difficult proposition. I would strongly recommend reading the whole report at the ‘Justice not Profit’ campaign website.
    Not sure how long we can ignore the litigation funding industry – it’s here and it’s clearly here to stay (with seemingly quite a lot of money behind it). Surely some sort of regulation will need to be implemented and why not do it sooner rather than later.

    – Jack, Solicitor


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