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Ongoing developments and reforms in the regulation of litigation funding in Australia appear to have also been taken up in the EU with the EU parliament looking to tighten its control over the litigation funding market.  In remains to be seen whether this is a wise move in the interests of ensuring the rights of claimants and consumers in obtaining access to justice when they have been wronged in order to level up the playing field against big corporates.

Australian context

Australia is as an example of a mature litigation funding market which has evolved from a market hamstrung by the shackles of the common law doctrine of maintenance and champerty) preventing investment by third parties) to a free market approach with funding widely adopted across the whole litigation market but most prominently in class actions.  However, in recent years the Australian market saw the implementation of much stricter controls with the requirement for funders to hold licenses, to comply with managed investment scheme provisions, to meet specific capital adequacy requirements and with increasing judicial intervention into what are “acceptable” levels of returns to funders.  Australia has recently done an about face with a change of government and reversed the requirement for funding licences, however judicial intervention in funding terms remains relatively common in class actions.

The EU reforms

The EU parliament has recently identified a number of apparent issues with litigation funding from a regulatory perspective, including

  1. Undue control, with the risk that funders may have too much influence and control over the running and outcomes of litigation;
  2. Conflicts of interest; in respect of inappropriate relationships between funders, representative entities, law firms, aggregators, claim aggregators, or other entities involved in the claim that may have an interest in the outcome of the litigation.
  3.  The abandonment of claims mid-litigation, leaving the claimants and their lawyers scrambling to find replacement funding on the run; and
  4. That funders should be responsible for defendants’ costs in unsuccessful litigation.

To manage these risks, the EU Parliament has recommended the establishment of a system of authorisation for litigation funders, enforcement measures and a complaint systems at a national level. Further, the parliament recommends litigation funders should be subject to oversight in a manner similar to that of the existing prudential supervision system applicable to financial services providers.

Further proposals to regulate funding in the EU include:

  • A limit on recovery – 60% of recoveries at a minimum should go to claimants, leaving 40% to be shared between funder, lawyers, service providers etc; and
  • Transparency – the Court and defendant should be aware of the existence of funding and the identity of funder.

The proposed changes to EU regulation of litigation funding mirror very closely what has been occurring in Australia in recent years.  EU law makers should be aware of the impact of this increase in regulatory controls in Australia, which most notably meant that some cases, particularly class actions against large and well capitalised corporate wrong doers, may have been refused by smaller funders or not funded at all.  That short term impact in Australia is now likely to be reversed given the change in ruling party has meant the requirement for a funding licence has been dropped.

Whilst funders agree that a reasonable level of control and regulation of the funding market is necessary, the question remains whether governments should be prescribing those controls and encroaching on the market’s assessment and pricing of litigation.  Those trying to create tougher controls should be reminded that the litigation funding market in places like Australia, the UK, the US and the EU is already extremely competitive, with most large pieces of litigation and arbitration attracting multiple funding offers.  This competition means that funders have to price at rates that would be attractive to the claimants and their legal teams (who also have an obligation, at least in the UK, to source multiple offers for their clients) and in many cases the funding terms are reviewed by courts to confirm they meet requisite standards.  Further, funders that have been operating for a number of years have reputations to upkeep and therefore want to keep law firms and their clients happy in order to win future business, which requires a good amount of self-regulation at first instance.

The UK

The UK is a good example of a litigation funding market that is thriving under self regulation.  In the UK, the largest and most reputable funders have signed up to the Association of Litigation Funder (ALF), which has adopted a code of conduct that has been followed in many other jurisdictions.  Further, the founding ALF members must approve new members.  Whilst some may argue self regulation is not enough to protect the interests of claimants and protect defendants from so called vexatious litigation, the score card in the UK to date shows that cases with strong liability merits and sufficient returns are able to be funded at competitive rates with little very limited judicial criticism or intervention.  Further, funders are primarily motivated by return on investment and have no interest in supporting litigation that does not have good legal merits prospects and therefore the claims funded are by and large viable claims with good prospects of success.

The ALF code of conduct covers issues of control of case strategy, approval of settlements and withdrawal from cases.  Incidentally, those are the same key issues that the EU parliament is currently grappling with.

Whilst discussion and reforms are always welcomed and necessary in developing markets, law makers must be careful not to throw the baby out with the bath water when making changes to regulation.  In litigation funding, high levels of regulation (as occurred in Australia recently) will likely lead to higher barriers to entry and less funders in the market, which may well mean higher pricing for consumers/litigants and or the unavailability of funding for certain case types where return multiples are no longer attractive.  One conception of funders is that they are greedy, however in a competitive market, greedy players do not win deals and as funders are now subject to the cost of money being priced in by their investors, the days of greedy and uncompetitive funders have long since passed.

Where tighter regulations are being considered, the EU parliament and other law makers should remain cognisant of the interests of claimants in obtaining finance for their claims and in particular whether any reforms proposed will end up limiting funding options for litigants.  If options are limited and/or not available, the balance of power will swing heavily towards large and well capitalised corporate defendants in getting away with injustices to consumers and less well capitalised counterparties.

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