The Regulation of Third Party Funding Agreements
Down Hall Country House Hotel
Minutes – 8 February 2008
The Civil Justice Council supported a proposition that regulated third party funding should be considered part of the mainstream of litigation funding. Are there any reasons why third party funders should not be regulated?
Opening remarks by Sir Anthony Clarke, Master of the Rolls
The Master of the Rolls opened the conference by announcing his belief that third party funding should be encouraged, provided that it is controlled. He articulated his concern that an unbridled market might lead to abuses. The Master of the Rolls considered that a degree of regulation is probably desirable. He asked if indeed some regulation is desirable, what form should it take and who should be responsible for regulation. He shared his concern that if the matter is not addressed, the creation of satellite litigation on costs could very well ensue. The Master of the Rolls touched upon Bob Musgrove’s introductory paper to the subject and reiterated the concerns expressed within it. He concluded his address by expressing the hope that the CJC will be able to play a vital role in this area, as it has in others.
Opening address by Michael Napier QC
Michael Napier explained that the conference would adopt the style of a facilitation event and would be conducted in accordance with the Chatham House rules. He outlined the role of the CJC as an advisory body and civil justice watchdog and proceeded to describe the factual context for the event, giving a chronology of the CJC’s involvement in third party funding.
Michael Napier stated that at the time of the CJC’s establishment ten years ago, third party funding was not a topic of concern. Over the past decade, a funding revolution occurred, leading to the “costs wars” which continue to this day. Napier said that the CJC was reluctantly drawn into this battle to try to solve the problems posed, as well as to implement improvements.
Michael Napier remarked that shortly after the Arkin decision, the CJC published a report in August 2005, which regarded third party funding as a future option for funding litigation. He explained that this was followed by a second CJC report in June 2007, issued shortly after the Fostif judgment, which stated that third party funding could have a role beyond group actions in mainstream litigation. Napier said that while this second report was in draft, the CJC held a costs forum, which ascertained the amenability of industry to third party funding. He added that the second paper attracted a considerable degree of publicity, with a flurry of newspaper articles and media interviews on the subject.
Michael Napier told delegates that regulation was firmly in mind when the CJC produced the second report. In this report, he stated, it was argued that third party funding would be acceptable so long as it was properly regulated. Napier commented that Fostif gave a stern warning about regulation and the need to balance access to justice with the need to prevent the system from falling into disrepute. He then alluded to the interest of transatlantic investors in British litigation to demonstrate the precariousness of this balance.
Napier observed that as far as third party funding is concerned, the public and regulators have “got the tiger by the tail”. Although the market is evolving rapidly, the regulatory response to this has been woefully slow. Napier considered this a potential danger, referring to the inadequate regulatory response to conditional fee agreements and the disastrous, unethical business practices which ensued. He then asked how steps could be taken to prevent this from happening with respect to third party funding.
Michael Napier closed his address by thanking delegates for their attendance and he noted the representative nature of the delegation. He then guided the audience through the conference papers and introduced the first speaker, Academic 1.
The principles surrounding financial services regulation – risks and protection. Who needs protecting and why? Who should protect and how?
Presentation by Academic 1
Academic 1 delivered a presentation on the principles surrounding regulation. He began by drawing attention to the importance of defining third party funding as a precursor to considering its regulation. Academic 1 explained the economic and non-economic arguments for regulation. He then considered the attendant risks of regulation and the proposed beneficiaries of regulatory protection.
Academic 1 outlined the statutory objectives of the FSA and its principles of good regulation. He then made suggestions as to the form and methods that regulation could take.
In conclusion, Academic 1 stated that litigation funding enables the legal process, and he contrasted it to banking and insurance. While he accepted that some regulation might be desirable, Academic 1 reminded the delegation of the need to consider rationally, decide wisely and hasten slowly. He added that use ought to be made of the extant regulatory framework such as case management of costs and existing legislation. Academic 1 ended his presentation by voicing his support for self-regulation and dialogue, and articulating the need to deal with court-imposed sanctions.
Michael Napier:
Michael Napier noted that it might be helpful to address the terminology relating to litigation funding.
Lawyer 1:
Lawyer 1 asked Academic 1 how the difficulties of pursuing insolvent and international funders could be dealt with.
Academic 1:
Academic 1 replied that the strategy to be adopted would depend on the intended goals. He questioned whether the issue of adverse costs is exaggerated and suggested insurance as a means of protection for defendants concerned about being sued by impecunious claimants.
Views from the funders. Would regulation (in whatever form) promote the effective development of a commercial funding market? If so, what shape might that regulation take?
Presentation by Litigation Funder 1
Litigation Funder 1 focussed his presentation on third party funding in Germany, Austria and Switzerland over the past decade. He informed delegates that these countries do not have the concept of maintenance and champerty and have not experienced any of the public policy problems encountered in the U.K. and Australia.
Litigation Funder 1 observed that the only practically relevant discussion about third party funding in these jurisdictions related to pricing, and has since been resolved. Although debate about the nature of third party funding has remained unresolved by academia and the courts, this has not had an impact on the market.
Litigation Funder 1 reported that he has been personally involved in over 150 cases and has never been sued in respect of them, adding that the vast majority of funding contracts continue through to the end of the case. He stated that he is aware of only two disputes between funders and claimants, sparked in each case by the claimant’s unsuccessful bid to terminate the funding agreement either before a lucrative settlement or favourable judgment. Litigation Funder 1 quipped that, in light of this, funders may need regulatory protection from claimants.
Litigation Funder 1 touched upon the issue of regulation, explaining that third party funders are deemed to fall within the remit of the national authorities responsible for financial services as opposed to banking or insurance. The authorities do not require upfront approval and have not made active steps to regulate litigation funders, but monitor the industry from a distance.
Litigation Funder 1 spoke of the stability of litigation funding in Germany, Austria and Switzerland, remarking that no funder has been insolvent, no loss has been known and that the market is relatively settled. He added that there have been hardly any new entrants over the past four years, and that there are five main players that account for roughly 90% of funding contracts.
Litigation Funder 1 regarded this system of litigation funding as simpler than the Australian model. He stated that third party funders in Germany, Austria and Switzerland do not set out the rules for funding to claimants as they are prevented from giving legal advice. Litigation Funder 1 noted that it is the responsibility of lawyers to advise clients of funding arrangements, commenting that solicitors are fairly well informed and that they perform this job very well.
Litigation Funder 1 hypothesised that the dissimilarity between third party funding in Australia and Germany is a result of the different regulatory approaches taken by the two countries. He recommended that the U.K. seek middle ground between the position of Australia and Germany, and adopt a light-handed regulatory framework. Litigation Funder 1 ended his presentation by suggesting that relevant stakeholders draft a code of conduct based on common sense and establishing ground rules for making litigation funding acceptable.
Master of the Rolls:
The Master of the Rolls asked if the company of Litigation 1 funds claims above a certain value and across the whole spectrum.
Litigation Funder 1:
Litigation Funder 1 answered that it provides funding across the spectrum but only for commercially viable claims valued at over €100,000.
Master of the Rolls:
The Master of the Rolls’ next question touched upon the question of transparency, and he asked whether the defendant always knows if the claimant is funded.
Litigation Funder 1:
Litigation Funder 1 responded that the decision as to whether to inform the defendant of a funding agreement is made on a tactical case-by-case basis.
Master of the Rolls:
The Master of the Rolls asked whether there was a legal obligation to disclose the existence of a funding agreement.
Litigation Funder 1:
Litigation Funder 1 responded that there was no obligation to disclose funding under law.
Master of the Rolls:
The Master of the Rolls asked about the extent of Litigation 1’s funding, and whether the defendants are protected in the event that the claimant loses the case.
Litigation Funder 1:
Litigation Funder 1 explained that his company not only funds claimants but also covers the opponent’s costs if the case is lost.
Academic 1:
Academic 1 asked at what level costs would be expected to run at.
Litigation Funder 1:
Litigation Funder 1 answered that a €100,000 claim will incur €10,000-€15,000 worth of costs.
Regulator 1:
Regulator 1 asked in which circumstances funders could withdraw from an agreement.
Litigation Funder 1:
Litigation Funder 1 replied that his company could withdraw from a funding agreement if there was a material change for the worse. He added that in those cases, his company would leave behind the money it had invested. As such, it is a tough decision to make and one that is only made rarely.
Lawyer 2:
Lawyer 2 asked about the “loser pays all” principle and whether the higher price tags in the UK would be a problem.
Litigation Funder 1:
Litigation Funder 1 stated that the loser pays principle is the same under German law. He referred to the fact that the German/Swiss/Austrian case costs are roughly 10-20% of the UK costs, and that this certainly a major difference, but that if the case is good the prospects are there and it should not be an obstacle to funding.
Lawyer 3:
Lawyer 3 asked whether the company of Litigation Funder 1 seeks to influence the claimants’ choice of lawyers or how they run the case.
Litigation Funder 1:
Litigation Funder 1 replied in the negative. Although it likes to be well informed and closely involved in the cases, it does not interfere in the choice of lawyers or the way in which the cases are run and it would not be qualified to either.
Lawyer 4:
Lawyer 4 asked about the position of intermediaries in Germany and the way in which the system operates in that regard.
Litigation Funder 1:
Litigation Funder 1 confirmed that there are intermediaries, adding that they are mainly insurance brokers. He stated that his company receives 90% of its cases from solicitors, 5% from brokers and 5% from clients directly.
Presentation by Litigation Funder 2:
Litigation Funder 2 spoke of the evolution in attitudes towardslitigation funding. From being regarded with cautionfive years ago, litigation funding has today attaineda sense of comfortable familiarity but this remains a fragile position and a great deal of education of lawyers and clients alike about how third party funding should operate, is still required. Litigation Funder 2 asked whatform regulation might take, at whom it would betargeted and whether some already exists. She advised that the key people at risk here are defendants,claimants, their lawyers and funders themselves. Litigation Funder 2 warned of the risksthat regulation might pose in terms of distorting themarket and being interpreted perversely. Claimants must test the viability of the funder upfront, their lawyers have the right to ask for monies on account if they are concerned about not being paid and defendants can ask for security for costs – which is more than a claimant can do against a defendant – the funder remains at risk throughout and faces the ongoing risk of the claimant not paying up on settlement – or seeking to terminate when a large settlement is in prospect. Inconclusion, Litigation Funder 2 advised that any future regulationought to be simple, if it is really required at all given the existing provision for protection of all parties involved in this process. What we do not want, she said is to create the same issues which arose around CFAs and the consequent staggering 182,000 legal challenges to them – it would without doubt kill third party funding if that were to occur.
Master of the Rolls:
The Master of the Rolls asked if the company of Litigation Funder 2 applies a value threshold before funding claims.
Litigation Funder 2:
Litigation Funder 2 explained that it only fundsclaims above £3 million.
Master of the Rolls:
The Master of the Rolls asked whether the defendantwould be completely protected if transparency as tothe existence and nature of a funding agreementexisted.
Litigation Funder 2:
Litigation Funder 2 said that, objectively speaking, a rule oftransparency would be a good idea and she said she always encouraged the funded claimant to inform the defendant of her company’s involvement.
Master of the Rolls:
The Master of the Rolls referred to existinglegislative provision with respect to consumers.
Insurer 1:
Insurer 1 emphasised the importance of ensuringthat funders may not withdraw from indemnity forcosts, over the provision of security for costs.
Master of the Rolls:
The Master of the Rolls noted that the amount forsecurity for costs becomes irrelevant when enforcedagainst losing claimants.
Lawyer 1:
Lawyer 1 raised his concern about the economicdisincentives that could ensue.
Lawyer 2:
Lawyer 2 pointed out that difficulties regardingcapital could be circumvented through amendment of theCPR.
Lawyer 4:
Lawyer 4 asked for Litigation Funder 2’s view on theconcept of a voluntary code.
Litigation Funder 2:
Litigation Funder 2 indicated a voluntary code with an emphasis on education of all using funding would not necessarily be a bad thing.
Presentation by Litigation Funder 3:
Litigation Funder 3 commented on the rapid development of third party funding and spoke of the importance of access to justice. He then focussed on the potential beneficiaries of regulatory protection and considered the form that such protection could take. Litigation Funder 3 closed his address by exploring the issues of transparency and security for costs, and exploring his preference for a non-regulatory solution.
Michael Napier:
Michael Napier asked Litigation Funder 3 whether he supported a form of voluntary code.
Litigation Funder 3:
Litigation Funder 3 wondered how a voluntary code would work and questioned its utility. He voiced his support for a laissez-faire solution.
Master of the Rolls:
The Master of the Rolls asked if there were a limit below which funding would not be provided.
Litigation Funder 3:
Litigation Funder 3 answered that third party funding could not stand as an economically viable alternative to conditional fee agreements in smaller claims.
Academic 1:
Academic 1 asked who would comprise the typical client base.
Litigation Funder 3:
Litigation Funder 3 replied that clients could represent a huge swathe of backgrounds.
Academic 1:
Academic 1 observed that there exists a large difference between a litigation funder who is enabling a vulnerable impecunious claimant to access justice and a litigation funder who is hedging risk for a large commercial enterprise which could afford to litigate but does not wish to take the downside risk.
Litigation Funder 3:
Litigation Funder 3 replied that solicitors have a duty to protect their clients. He added that many solicitors do not understand the available funding options but that they may differentiate between CFA and non-CFA cases.
Michael Napier:
Michael Napier considered whether regulated solicitors rather than regulations could be the way forward.
Litigation Funder 3:
Litigation Funder 3 referred to costs sharing agreements, pointing out that many solicitors remain ignorant as to what they are and he touched upon the mechanical difficulties in running cases.
Academic 1:
Academic 1 explained that the issue facing a funder is how is he going to get paid from the settlement. A prospective class action comprised of a large number of claimants each with a small claim is unattractive unless it is known at the outset that all claimants are in the action unless they opt out. To assemble claimants on an opt-in basis involves considerable expenses which renders the whole exercise unattractive, especially as only a small proportion will participate.
Litigation Funder 3:
Litigation Funder 3 commented that funding group actions would depend on who the organisation representing the group is. The mechanics of running such a case is difficult. Group action would not be cost effective when one has to gather claimants with small claims. Litigation Funder 3 concluded that IMF is to collaborate with Morris Blackburn in group actions.