Litigation funders need certainty to keep Britain’s class action regime fair

Litigation funding poses significant risks, and the delays and uncertainty surrounding new regulations are exacerbating these challenges, according to Leslie Perrin. The UK's status as a premier destination for investment and a reliable legal jurisdiction relies on frameworks that are both efficient and predictable. Hence, the government's recent proposals for a more streamlined approach to the opt-out collective action regime are appreciated.

These recommendations, which emerged following a consultation by the Department for Business, focus on expediting payouts in successful class actions, managing legal expenses more effectively, and implementing procedural improvements.

Opt-out collective actions have been a crucial aspect of the UK's legal landscape for the past decade. They play a pivotal role in maintaining effective competition law enforcement, deterring anti-competitive practices, and ensuring fair competition, thereby preserving access to justice and market confidence across the country. The success of these cases depends heavily on the financial contributions from third-party litigation funding firms.

However, this industry has faced considerable uncertainty in recent times, with funding entities still awaiting the execution of recommendations from the Civil Justice Council on investment returns and government legislation aimed at rectifying the 2023 Supreme Court decision, known as PACCAR.

The central issue now revolves around the opt-out regime's future: the CAT's evolving stance on litigation funding agreements and its seeming disregard for the substantial commercial risks assumed by those who finance these cases. Funding such proceedings requires substantial capital, as funder's invest in claims that may drag on for years before resolution.

In return, they receive a share of any recovered funds if the claim is successful, though they face the risk of losing their entire investment if the claim fails. The recent actions of the CAT, including the willingness to reevaluate funding arrangements and priority agreements after a case's conclusion, are causing considerable concern.

The notion of "success" remains ambiguous and could hinge on unpredictable factors that were not foreseeable when the funding was initially committed.

The fluidity of capital is a critical factor for the sustainability of litigation funding. Investors are less likely to commit resources to litigation if the anticipated returns do not adequately compensate for the inherent risks. Therefore, any uncertainty or unattractiveness in returns could redirect investment away from litigation, undermining the industry's viability.

For funding agreements to be effective, they must be negotiated and priced based on risks assessed at the outset. If returns can be recalculated years later, uncertainty escalates, making funding more expensive and potentially halting the settlement of claims.

While the importance of scrutinizing corporate behavior is justified, so too is the need to ensure that the returns to funding entities are evaluated fairly. However, this scrutiny should be balanced with the necessity of maintaining a level playing field. The CAT's role in safeguarding the regime's effectiveness for the next decade hinges on its commitment to recognizing and respecting the risks inherent in financing access to justice.

This is not merely a debate about litigation funding; it is a test of the UK's dedication to a predictable, stable, and investor-friendly legal environment, which is essential for sustaining access to justice and market confidence.