Recently the European Union set in motion what may become a very significant overhaul of how litigation funding functions across all member states. In a report written by German MEP Alex Voss of the EU parliament’s Legal Affairs Committee, a case was made for the EU to make a concerted effort to avoid the fostering of a Third-party litigation funding (TPLF) culture such as has become common in the UK and in other common law jurisdictions. There, Voss suggests, funders themselves have stood to gain the most and the claimant’s best interests have become subordinate to the funder’s profit objectives.
Voss asserted that the ‘soft law’ approach taken by the UK has not been effective in providing sufficient safeguards for consumers. Voss asserts that funders have been demanding far too much from cases and the actual litigant is not getting enough back. The issue of ‘actors seeking profit maximisation at the expense of claimants’ is one which the report suggests is rampant across common law jurisdictions. Favouring supposed prevention over cure, Voss commented:
‘The European Union should use this matter to demonstrate to its citizens that the European Institutions are not only able to find solutions after a crisis has done already severe damage but that they can also act pre-emptively, at an early stage to stop the further erosion of our justice system and to guarantee adequate compensation and protection for our citizens.’
TPLF has been a key feature of litigation in the UK, and other common law jurisdictions, notably the USA, for some time. The practice, which involves a third party who has no prior connection to the litigation funding the proceedings in exchange for a percentage of the settlement, has been a viable and reliable means through which litigants with limited resources but legitimate claims have been able to secure funding and bring a claim. In the UK, this area of speciality finance has been reported to have quadrupled in size since 2013 to over £1 billion with no signs of waning growth. For those considering or currently engaged with funded litigation in the UK, it’s worth considering how accurate Voss’s characterisation of TRLF culture is and what impact, if any, EU regulation in this area will have outside of the borders of the block.
Reactions to the Voss report have been mixed. Tets Ishikawa, a litigation funder writing for the law society Gazette, suggested the report was ‘unsatisfyingly hollow’ and called for reactions to be kept in perspective at this stage as no real substance has been put forward. Ishikawa took issue with the profit figures cities in the report and the characterisation of the risk incurred by funders. He noted the comments come from an ‘own initiative report’, a formal request by the European Parliament to the European Commission to propose legislation in the area. Such reports are typically broad in focus and lacking in specifics. This means that there are still several steps to be taken and much detail to be added before a regulation based on the report sees the light of day. One of these steps is a full consultation with key stakeholders such as litigation funders themselves. Input from European Litigation Funders Association (ELFA) and the International Legal Finance Association (ILFA) will come at the Commission stage and may well lead to a more measured approach being taken in any resulting regulation.
Detractors of the report have suggested that Voss has failed to cite any real evidence for his many far-reaching claims, the report has been compiled with far too much focus on curtailing the profits of TPLF with little regard to the real and tangible benefits of the system. Voss largely ignores the huge financial risks incurred by TPLFs. He omits the fact that most cases take many years to resolve, many are settled for less than expected and cost more than initial budgets allow for. Citing data from Burford Capital, Ishikawa notes that 109 out of 173 cases taken on by the firm had generated a positive return. In many cases, such funding models are the only way that many cases gain viability. Ishikawa suggests that funders take the lead in illuminating such points and in framing the conversation around their work to ensure the EU fully accounts for the actual substance of the work they undertake.
Included in the report are the following provisions which have been put forward to be considered by the commission:
- the establishment of a system of authorisation for litigation funders,
- a requirement for litigation funders to respect a fiduciary duty of care to the claimants,
- a requirement for funders to be responsible for the costs arising from unsuccessful litigation,
- a cap on the possible profits of TPLFs; only in certain circumstances should the claimants get less than 60% of the claim,
- an obligation for litigation funders active in the union to conduct their business from within the Union.
Such bold provisions would set the EU apart for its approach to TPLF, and the EU consumers seem to be on board. Writing in The Parliament Magazine last year, Voss cites a multi-member state survey undertaken which suggests that 83% of consumers want safeguards for TPLF in the EU. If such figures are truly representative of consumer views, it seems inevitable to expect some, if not all, of Voss’ proposed provisions to be accepted by the Commission.
While those currently undertaking litigation in the post-Brexit UK can rest assured that they will not be subject to these or any other new EU regulations, they are worth paying attention to in so far as they may indicate a trend that other jurisdictions may follow in the future. Those conducting cross-border litigation involving an EU member state will need to pay special attention.
It remains to be seen what if any the UK’s legislative reaction will be to this regulation of TPLF. As in many regulatory areas, London has often defined itself in contract rather than in harmony with decisions taken in Brussels. This area could prove to be no exception. Regardless of any direct impact such large-scale changes are worth paying attention to.
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Written by Robert McDonnell