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US Chamber steps up bid to have third-party funding regulated

Money is flying into third-party funding, report claims [1]

Money is flying into third-party funding, report claims

The US Chamber of Commerce has stepped up its long-running campaign to have third-party litigation funding (TPLF) regulated in the UK, publishing research that purported to show strong public support for the move, along with a market analysis that said the industry has “ballooned”.

Launching a campaign called ‘Justice not Profit’, the chamber – whose concerns focus in particular around the new opt-out group actions allowed under the Consumer Rights Act 2015 – said that the expansion of TPLF “fundamentally changes the English civil justice system and has matured past self-regulation”.

It cited Lord Justice Jackson, who recommended in his civil costs review that “the question whether there should be statutory regulation of third party funders… ought to be re-visited if and when the third party funding market expands”.

The chamber has been active in the UK for several years and unsuccessfully lobbied Parliament to introduce regulation during the passage of the Legal Aid, Sentencing and Punishment of Offenders Act 2012.

The survey of 1,261 people, conducted by pollster BritainThinks, identified hostility among consumers to the so-called compensation culture and moved on to ask about TPLF.

This is how it was explained to them: “[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.”

From that definition, 14% of those surveyed felt positively about TPLF, 63% were negative, and 23% didn’t know.

Then asked about the arguments supporting TPLF, the only one that found marginal favour was that with legal aid drying up, TPLF would fund cases that might not otherwise make it to court. Respondents disagreed with the suggestion that it helped consumers stand up to big businesses.

As a result, they supported a mandatory code of conduct with “meaningful penalties”, a cap on fees and government licensing of all funders.

The market analysis said that, based on publicly available information, global assets under management by 16 funders operating in the UK are over £1.5bn, a 743% growth since 2009. “The actual growth is probably much higher [as] many funders do not publish their financial data.” It said average investments were now £3m-5m.

However, the figures did not say how much of that cash was backing litigation in the UK, rather than abroad.

The analysis noted that only seven of those funders have signed up to the voluntary Association of Litigation Funders and its code of conduct, and said the code had little teeth anyway. It was critical of the absence of any requirement to disclose the existence of funding to the court or opposing parties, and the lack of transparency in the market.

“The trend of litigation funding as a corporate or law firm finance instrument has resulted in the potential development of a class of financial instruments based on litigation investments,” it added.

“The possibility to mask the risk of less secure investments (ie, speculative cases) through bundling with higher-quality ones creates a new class of unregulated financial products and present certain public interest risks.”

The report concluded: “The industry has outgrown self-regulation and has already reached the critical point referenced by Jackson LJ: a point where regulation is necessary. If left ungoverned, litigation funding stands as a troubling risk to the market and to litigation in the UK.”

Arundel McDougall, executive director of the European Justice Forum, backed the findings. He said: “TPLF is a derivatives market and the underlying asset is litigation. Bundles of rights are speculated as a commodity for profit by those whose attachment to the issues at stake is limited to generating a sufficient return on their investment.

“Lawyers conducting such litigation may see it as a commercial proposition but are heavily regulated to ensure compliance with highest standards. Third party funders should not object to some common sense regulation if that helps to address public concern.”

Malgosia Fitzmaurice, professor of public international law at Queen Mary University of London, added: “Given the huge public concerns about casino justice and the US-style justice system, the government and other key decision-makers must act now before trust in the system is further eroded.”

Louis Young, MD of Augusta Ventures, which unlike most funders focuses on smaller cases, said: “Litigation funding, in our experience, is about enabling access to justice for both individuals and SMEs who would otherwise not have the means to enforce their rights – and 92% of our cases are successful.

“Like any financing business, of course, we look to make a profit out of it too, which is why it makes no sense to support spurious cases. All that would do is end up costing us money. For these individuals and business owners, 80% of something is a lot better than 100% of nothing.

“We believe that the ‘Justice not Profit’ agenda is being advanced by a select few large bodies and interest groups who find themselves as habitual defendants in cases across the globe, fronted by the US Chamber of Commerce. They are understandably alarmed that one of the key tactical weapons in their defence arsenal – delay and obfuscation until the other side runs out of funds – is now no longer effective.”