UK reform of litigation funding – CJC issues Final Report recommending sweeping reforms

Context for the review and scope

The Civil Justice Council (“CJC”) is a statutory advisory public body tasked with reviewing the civil justice system and making recommendations on its development. Its Final Report responds to the previous government’s request for advice concerning litigation funding. 

The context for the review is that the litigation funding industry has been in a state of flux since the Supreme Court’s judgment in July 2023 in the PACCAR case. The Court held that a litigation funding agreement (“LFA”) that provides for the funder’s return to be calculated as a percentage of the damages awarded constitutes a damages-based agreement (“DBA”) and therefore must comply with the DBA Regulations 2013 (and, importantly, are prohibited in opt-out collective actions in the Competition Appeal Tribunal (“CAT”)). Prior to PACCAR, most LFAs did not comply with the DBA Regulations. A bill introduced by the previous government to reverse the impact of PACCAR was derailed by the UK general election in June 2024 and the new government indicated a preference for broader reforms.

The CJC’s Interim Report (covered in our previous update) addressed the current position of third party funding and launched the CJC’s public consultation. There was significant engagement with the consultation – the CJC received responses from over 80 consultees putting across a variety of views. 

Overview of the recommendations

The Final Report makes 58 recommendations in total. They are wide ranging, covering almost all aspects of litigation funding, including: 

• the reversal of the effect of the Supreme Court’s judgment in PACCAR; 
• statutory regulation of litigation funding, with enhanced regulation where the funded party is a consumer or in collective proceedings, representative actions, or group litigation; 
• regulation of portfolio funding, litigation loans, crowdfunding, and pure funding; and 
• reform of DBAs and Conditional Fee Agreements (“CFAs”, which are typically ‘no win no fee’ arrangements where no fees are due if the claimant loses but a success fee is payable to the lawyer if the claim succeeds (capped at 100% of fees due on a time spent basis)). 

We outline key features of the CJC’s recommendations in further detail below:

1. The first recommendation is that the effect of the Supreme Court’s judgment in PACCAR be reversed by legislation (with retrospective effect). The CJC proposes a ‘twin-track approach’ whereby PACCAR would be reversed first as a matter of urgency, with the implementation of the balance of its recommendations to follow. 
2. The CJC recommends what it calls “light-touch regulation” of litigation funding through regulations that would replace the voluntary Code of Conduct for Litigation Funders (the “Code”), which is currently administered by the Association of Litigation Funders. These regulations would include a minimum set of requirements, including: 
   • funder capital adequacy requirements (to be determined on a case-specific basis); 
   • a prohibition on litigation funders controlling funded litigation; -conflict of interest provisions; 
   • anti-money laundering requirements; and -early disclosure of the fact of funding, the name of the funder, and the ultimate source of the funding (although the terms of the LFA would not generally be disclosable). 
   • Although many of these requirements are present in the Code or apply already to some extent (as a matter of law or by procedures of the courts or the CAT), giving them the force of regulations, the breach of which would have serious consequences (see below), would be a significant change. 
3. Enhanced regulation would apply where litigation funding is provided to consumers and parties engaged in collective proceedings, representative actions and group litigation, including: 
   • a ‘Consumer Duty’ for litigation funders modelled on consumer protection regulation in the financial services sector;
   • funded parties being provided with independent legal advice from a King’s Counsel concerning any proposed LFA; 
   • a requirement that the funder and the funded party’s lawyer certify to the court that they did not approach either directly or indirectly the funded party to seek their agreement to pursue proceedings; 
   • a requirement for after-the-event insurance with robust anti-avoidance endorsements; 
   • approval of the LFA by the court or CAT as applicable, with particular consideration to be given to whether the funder’s return is “fair, just and reasonable”; and 
   • in the case of opt-out collective proceedings in particular, enhanced notice of the litigation funder’s return to class members. 
4. The development of standard terms for LFAs, to be included in the new regulations. 
5. The creation of a low-cost and binding dispute resolution process for resolving disputes between funders and funded parties. 
6. Breaching the regulations could render the regulated LFA unenforceable, albeit this would be tempered by a judicial discretion to waive breaches. In addition, security for costs would be required of litigation funders where they fail to comply with capital adequacy requirements. 
7. Mandatory and enhanced costs budgeting and costs management, including the potential for pre-action costs budgeting, would be introduced for all funded collective proceedings, representative actions, and group litigation. 
8. The CJC considered whether caps should be imposed on the returns available to litigation funders and/or whether there should be a prescribed minimum return to funded parties. However, it recommended against either measure on the basis that they are blunt instruments incapable of taking proper account of the variable risks of funding different claims. 
9. Litigation funding costs should be recoverable in principle but recovery should be confined to exceptional cases, taking into account factors such as the defendant’s conduct, the claimant’s financial position, and the necessity of litigation funding. 
10. Reform of the CFA and DBA regimes, including: -taking claims management services outside of their scope; 
    • introducing a judicial discretion to find non-compliant agreements enforceable; 
    • lifting the prohibition for DBAs in opt-out proceedings in the CAT; and 
    • the enactment of comprehensive reforms to DBAs proposed by the DBA Reform Project in its 2019 report (with necessary adjustments). 
11. Regulation of portfolio funding as a form of loan regulated by the Financial Conduct Authority (“FCA”). 
12. Where crowdfunding of litigation is provided on the basis of a financial benefit to the crowdfunders, this would be regulated as a form of litigation funding; where crowdfunders would not receive a financial benefit, minimum requirements would apply for the protection of donors. 
13. The CJC considered whether regulatory responsibility should be transferred from the Lord Chancellor to the FCA. Although it considered that there is a “great deal of force” in that proposition, it recognised that this is not a straightforward question and recommended that the issue be deferred for consideration in its proposed post-implementation review. 
14. The CJC recommends that consideration be given to establishing an ‘Access to Justice Fund’, which could provide funding to the civil legal aid fund. It is suggested that this be funded by a small percentage of profits from litigation funding and CFAs/DBAs. 

Impact of the recommendations

Notwithstanding the CJC’s characterisation of its proposed regulatory regime as “light touch”, its wide-ranging recommendations would, if implemented, mean significant changes to the litigation funding landscape in the UK. Although the recommendations do not extend to reforming arbitration proceedings, the CJC envisages arbitral centres considering whether to and, if so, how the reforms should be implemented. 

Many of the recommendations go with the grain of existing practice in that they involve codification (with modification) of the Code requirements and judicial procedures that are well established, particularly in collective proceedings before the CAT. 

However, one recommendation that would, if implemented, represent a profound change in terms of how claims are currently incepted is the requirement for the funder and the funded party’s lawyer to certify to the court that they did not approach the funded party to seek their agreement to pursue proceedings. It is relatively common for funders or lawyers to seek parties willing to start a claim. There have also been several cases in the CAT where the class representative has confirmed that the claim originated with them being approached by the funder and/or law firm with a proposal for the collective proceedings (and this did not prevent those claims being certified). Although the CJC suggest that if a lawyer or funder wishes to pursue collective proceedings then they could put themselves forward as the class representative, this may be unrealistic given the likelihood of potential conflicts of interest between the law firm/funder and the class members. 

Another notable deviation from established practices proposed by the CJC is the recommendation that the CAT (and the courts) assess whether a funder’s return under a proposed LFA is “fair, just and reasonable” as part of the approval of the LFA. This would presumably mean that question being considered by the CAT when determining whether to certify proposed collective proceedings. However, the CAT’s practice is not to assess the reasonableness of a funder’s return under an LFA at certification stage (save for assuring itself that the funder’s return is not excessive and disproportionate) on the basis of the judicial determination that this question is more appropriately addressed at the time of distribution.

The recommendation for standard LFA terms would go some way to mitigating the impact of the recommendation to make it mandatory for the funded party to receive independent advice on the LFA terms. This is however just one example of where the CJC makes high-level recommendations that leave much of the heavy lifting to be done at the legislative and implementation stage. 

Where next? 

The Final Report will now be considered by the Lord Chancellor. With the exception of the recommendation for the reversal of PACCAR, which the CJC proposes that the Government prioritise, the CJC envisages its recommendations being implemented through a single comprehensive statute. 

The consultation responses demonstrate the strength and range of opinion among stakeholders, and it remains to be seen whether and to what extent the Government agrees with the judgement calls made by the CJC in striking the right balance between facilitating access to justice and providing appropriate and effective protection for funded parties and defendants. 

Authored by Andrew Leitch and Sam Brown.