The Civil Justice Council review of Litigation Funding has been published. The CJC can only make recommendations so it remains to be seen what aspects of the report will ultimately be adopted. Sir Geoffrey Vos (Master of the Rolls) has already made known his support for the final report and its recommendations already. The report is detailed at 150-pages. This article looks at some of the key issues and recommendations.
A key takeaway is the line that “the validity of funding arrangements ought properly to be a matter between the parties who enter into the funding arrangement.”
There is a lot of interesting stuff to takeaway and consider.
Some key headline recommendations include:
- Reversal of PACCAR with retrospective effect to confirm that litigation funding is not a form of DBA or a form of claims management service.
- Introduction of discretion for recovery of funding costs where there is a Litigation Funding Agreement by the court in exceptional circumstances.
- Introduction of mandatory Costs Budgeting for all funded collective proceedings, representative actions and group actions to include provisions for budgeting of pre-action costs (which it is believed may encourage pre-action settlement).
- Introduction of new regulatory framework for Litigation Funding.
- Introduction of new Pre-Action Protocol for Mass Claims in both civil proceedings and in the Competition Appeal Tribunal (CAT).
- Hybrid Funding Arrangements to be made lawful.
- Review of levels of success fees in relation to the current 25% cap of applicable damages and also specifically in mesothelioma cases and whether these need uprating for inflation.
- Introduction of an Access to Justice Fund which would be funded by a percentage of profit from both litigation funding and contingency fee funding (i.e. CFAs, DBAs etc).
Why has there been review of Litigation Funding?
The CJC has looked at reforms to litigation funding with the aims of promoting effective access to justice, considering how third party funding should be regulated and looking at improvements to the provision and accessibility of other forms of litigation funding.
The recommendations are designed to address challenges around access to justice.
The report makes clear the distinction between contingency fee funding which is defined as funding provided to a party by their legal representative (such as a CFA or DBA) and litigation funding which is funding by an individual or business who is not a party’s legal representative. The CJC’s view is that these should be subject to separate regulatory regimes.
The CJC has recommended that the changes be delivered through a single, comprehensive, statute.
Key Findings – Contingency Fee Funding (i.e. CFAs & DBAs) & More
The key findings of the report on Contingency Fee Funding (those between a consumer and legal representative) (and more) are as follows:
1. There should be a singular regulatory contingency fee regime.
2. Regulation should clarify that hybrid arrangements are lawful.
3. Where commercial parties enter into a DBA there should be no cap on the lawyer’s return.
4. The indemnity principle should be abrogated legislatively where contingency fee agreements and LFAs are concerned. This makes sense as contingency fees may exceed the legal costs expended.
5. Provision should be made for court discretion to enable non-compliant contingency fee agreements (or CFAs and DBAs) to be enforceable.
6. Government should review the current CFA success fee levels, particularly for mesothelioma claims, to ascertain if they need uprating for inflation. This includes consideration of the 25% cap on applicable damages. Recommendations are made to follow the Scottish Approach of a staged damage-related cap on success fees. In PI / Clinical Negligence cases in Scotland there is a cap in respect of the financial benefit of the first £100,000 of 20%, then 10% in relations to amounts over £100,000 but not exceeding £500,000 and 2.5% on any amount over £500,000. For clarity there's no suggestion at this stage that the percentages set within Scotland would be those adopted in England and Wales but it does demonstrate how a staged cap could potentially work. The other point of note is that in Scotland there is no distinction between past and future losses as there are in England & Wales.
7. The government should consider adopting in commercial litigation a cap on the success fee payable as is already in place in Scotland (for commercial litigation that would be a cap of 50% of any financial benefit).
8. Responsibility for the new regulatory regime should be with the Civil Procedure Rules Committee and not the Ministry of Justice. In addition, there should be consideration regulatory reform in order to promote freedom of choice of legal representative for the insured.
9. Government should promote uptake and utility of Legal Expenses Insurance. Consideration should also be given to the promotion of BTE insurance as a benefit-in-kind to employees which would be tax deductible.
10. Government should also consider whether to introduce an Access to Justice Fund, which could provide funding to the civil legal aid fund to be used for the provision of early legal advice and alternative forms of dispute resolution (non-court based). The recommendation is that this be funded by a small percentage of profits from both litigation funding and contingency fee funding arrangements.
Key Findings – Litigation Funding
The key findings of the report on Litigation Funders is as follows:
1. There should be a reversal of PACCAR (where Litigation Funding Agreements were classified as Damages Based Agreements) as soon as possible. These changes should make clear that litigation funding is not a form of DBA and is a distinct form of funding. It should also make clear that litigation funding is not a form of claims management service. This change should have both prospective and retrospective effect.
2. There should be an introduction of ‘light-touch’ regulation for litigation funding. Regulation by the Financial Conduct Authority (FCA) is not recommended at this stage, though will be revisited in five years following the introduction of the ‘light-touch’ approach.
3. Regulation should differ depending upon whether the funding is provided to commercial parties or consumer parties. Regulation for commercial parties needs only to be minimal. Breaches of any of the regulations would see any regulated funding arrangement rendered unenforceable, though the court will retain powers to waive regulatory breaches where it is just and reasonable to do so.
4. The minimum base-line of regulatory requirements will include:
a. Case-specific capital adequacy requirements;
b. Codification of the requirement that litigation funders should not control funded litigation;
c. Conflict of interest provisions;
d. Application of anti-money laundering requirements
e. Disclosure at the earliest opportunity of the fact of funding, the name of the funder and the ultimate source of the funding, though the terms of any LFA should not generally be subject to disclosure.
5. Additional regulatory requirements for consumers would include:
a. Application of a regulatory Consumer Duty;
b. Requirement for funded parties to be provided with independent legal advice from a King’s Counsel (KC) concerning proposed LFAs.
c. Where there are collective proceedings court approval may be required for the terms of the agreements and on whether the litigation funder’s return is “fair, just and reasonable”.
d. Provision should also be made for enhance notice of the litigation funder’s return to class members during the opt-out period in collective proceedings.
6. ATE insurance should be in place where funding is provided for a non-commercial party or for collective or group proceedings.
7. A cap on litigation funder’s returns has been rejected by the CJC.
8. There should be standard terms for LFAs and a mechanism introduced for independent, low cost and binding resolution of disputes between funders and funded parties. The proposed standard terms are annexed to final report.
9. Effective Legal Services Regulation should be put in place where litigation funding is concerned. The current approach should be reviewed.
10. Recommendations are also made to provide a statutory power to the civil courts and CAT to manage and budget the costs of claims funded by a litigation funder and the pre-action phase of funded litigation. The court should also be able to consider whether and if other, no court-based forms of redress are available.
11. Budgeting should be mandatory for all funded collective proceedings, representative actions and group actions. In other claims the fact that a claim is funded by litigation funding should be a factor in considering whether to costs manage a case. A new guidance note for budgeting should be developed jointly by the CPRC and CAT Rule Committee.
12. There should be a new Pre-Action Protocol for collective claims, enhanced costs budgeting and costs management for funded collective proceedings, representative actions and group litigation.
13. Provision should be made for the recoverability of litigation funding costs in exceptional circumstances. Both the CPR and CAT rules should be amended to include this discretion. Exceptional circumstances will include factors such as the Defendant’s conduct, the Claimant’s financial position and the necessity of litigation funding.
14. The approach to the Arkin Cap (principle that a litigation funder's liability for adverse costs following an unsuccessful case is capped at their investment) post-Chapelgate should be codified in both the CPR and CAT rules. This means the court has discretion to disapply the Cap.
15. A presumption of security for costs was rejected but could be required where a litigation funder breaches regulatory requirements concerning capital adequacy. Where the litigation funded or funded party has complied with regulatory requirements concerning capital adequacy and there is suitable ATE in place (with effective anti-avoidance endorsements) then security for costs should not be available. Funders may be responsible for costs of providing security where regulatory requirements are breached and it is not fault of the funded party.
16. Portfolio funding should be regulated by the FCA as a form of loan.
17. Crowdfunding, where it is on the basis of a financial return to the crowdfunders should also be regulated as a form of litigation funding. Where it is provided on the basis that the donor will not receive a financial benefit then it should be subject to minimal regulatory requirements. This is to primarily address concerns over potential money laundering and to ensure any funds are used for their intended purpose.
18. Law firms and funders should be placed under a duty to provide HMCTS with data concerning LFAs to include the nature and type of funding, the nature of any success fee or return to the funder and the legal costs incurred.
19. Litigation funding of arbitration proceedings should not be subject to formal regulation. It should remain for arbitral centres to decide whether and how any regulation should be implemented.
There is a lot to digest in this report but clearly there are a significant number of important and interesting recommendations made. It remains to be seen what aspects are brought into force but as mentioned Sir Geoffrey Vos has been clear in his support already. The report gives a strong indication of the direction of travel and it is good to hopefully finally some clarity post-PACCAR. There is clearly a lot of work to be done and no doubt stakeholders will have a big role into play with it.
Should you have any queries arising from this article or upon costs generally then please do not hesitate to get in touch with our friendly team either via phone 01482 534567 or e-mail info@carterburnett.co.uk.
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