The voluntary third-party funding code is a step in the right direction, but will we need more formal regulation in the future?

December 22, 2011

This article was written for and first featured in Solicitors Journal

Third time lucky

The voluntary third-party funding code is a step in the right direction, but will we need more formal regulation in the future? Gavin Foggo and Caroline Benham report

When the Civil Justice Council (CJC) formed a working party to consider regulation of third-party funding of civil litigation in 2007, the third-party funding market was in its infancy and Lord Justice Jackson’s review of civil litigation costs was yet to start.

Some four years on, a change of name from ‘third-party funding’ to ‘litigation funding’ and two previously published, heavily criticised, draft voluntary codes of conduct for litigation funders later, the CJC finally launched its Code of Conduct for Litigation Funders on 23 November 2011, alongside the formation of an Association of Litigation Funders of England and Wales (ALF), whose members will agree to abide by the code.

The voluntary code sets standards of practice and behaviour for litigation funders that funders anticipate will become a ‘kitemark’ for litigation funding. The ALF hopes solicitors will only recommend to their clients funders who belong to it.

The final code is simpler and more succinct than earlier drafts. It contains 11 points regulating funder behaviour towards the litigants it funds, or potential litigants it markets its services to.

The code envisages that litigation funding agreements, or LFAs, will be concluded between funder and litigant and includes requirements for a funder’s promotional material to be clear and not misleading. It also details specific provisions to be included in the LFA, such as whether or not the funder will have an input into decisions on settlement of the dispute and whether it is liable to meet adverse costs awards or for ATE insurance premiums.


Ironing out the difficulties

Some of the main criticisms of the earlier draft codes came from Jackson LJ, who considered: (1) the capital adequacy provision in the draft code that a funder should be able to meet its liabilities for the next three months was “plainly inadequate”; (2) a funder should not be entitled to terminate the funding agreement mid-litigation without good reason as appeared to be permitted; and (3) there should be proper restriction and clarity about the extent to which a funder can influence the litigation.

In his speech launching the final code, Jackson LJ was confident these difficulties had been addressed. Clause 7(d) contains a three-year capital adequacy requirement for funders. Clauses 9 and 10 specifically state a funder may only withdraw its funding if it reasonably believes: either that there has been a material breach of the funding agreement by the litigant or that it is no longer satisfied about the merits of the dispute or that the dispute is no longer commercially viable.

Clause 7(a) provides that a funder will take reasonable steps to ensure a litigant has taken independent advice on the contents of the funding agreement and that a funder should not seek to influence the litigant’s legal representatives or to cause them to act in breach of their professional duties. Clause 11 provides that, if the funder terminates the LFA, it remains liable for all obligations accrued to the date of termination, unless termination is due to a material breach by the litigant. It also states that, if there is a dispute about settlement or termination, a binding opinion must be obtained from a QC.


Is it enough?

However, the code has still attracted criticism. Some consider voluntary rather than statutory regulation insufficient. Just the day before the code’s launch, four Liberal Democrat peers laid an amendment to the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) in its second reading, which, if passed in its current form, would require funders to obtain a licence from a statutory licensing body. Jackson LJ commented in his report (page 124) that “the question whether there should be statutory regulation of third-party funders by the FSA ought to be revisited if and when the third-party funding market expands”.

Currently the market consists of a small number of reputable funders. The market is expanding only slowly. Just as new funders are entering the market, a more established player, Allianz, withdrew in October 2011, despite being one of only four funders represented on the CJC working party.

It is understood that Allianz’s decision was as a result of conflicts where it was also underwriting the defendants, demonstrating one of the main issues for potential funders considering entering the market.

Further, the code only applies to litigation funding in England and Wales, not to claims bought by UK litigants internationally. This is, arguably, a surprising omission given that, to date, it is high-value commercial disputes with corporate litigants (many of whom will operate internationally) that have been an important part of the funders’ market.

The code is a step in the right direction. Voluntary regulation is better than no regulation. It remains to be seen whether more formal regulation is required. Much depends on how successful the code, as overseen by the ALF, is perceived to be, and how the litigation landscape develops in the next couple of years. The litigation funding market is small currently, and populated by only a handful of players.

If, perhaps as a result of the Jackson reforms, there is a surge in funder numbers, or if a funder becomes insolvent and leaves litigants in difficulty, or if the ALF is ineffective in enforcing the code, there will be much greater pressure for the compulsory regulation of funders.

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