September 17, 2015

Increasingly Americanised Litigation System Breeding Third Party Litigation Funding

The British people have voiced their concerns about the legal climate in England and Wales, and a market analysis on third party litigation funding (TPLF) has fortified their concerns about the erosion of the civil justice system. The findings elevate the concerns of the Justice not Profit campaign, which aims at preventing exploitation and abuse of the civil justice system for profit.

BritainThinks surveyed 1,261 members of the public in England and Wales between 31 July and 4 August 2015 on behalf of the Justice not Profit campaign and found that over half of those surveyed feel like the civil justice system is becoming increasingly Americanised, and view this trajectory negatively. This Americanisation is being shaped by an increase in advertising for compensation and legal services in the past three years. One respondent commented, “…people are being encouraged to extract money from companies and other people…this all came from the USA…”. Also contributing to the compensation culture is the rise in third party litigation funding.

The BritainThinks survey showed that people are concerned about hedge funds and other third party litigation funders who invest in litigation without any direct ties to the case. For example:

  • 63% of respondents view TPLF negatively.
  • 59% believe that third party litigation funders exist to make a profit, not to deliver justice.
  • 57% believe that litigation funders do not care what is in consumers’ best interests.

The public’s sentiments are reinforced by a market analysis conducted by Westbourne Communications demonstrating the growth of the TPLF industry in the UK. The study estimates the number of players in the UK market to be between 16 and 25. However, since only a limited number of funders publish their financial results, the true scale of the industry is probably much larger. This public information shows that since 2009, the global assets under management by litigation funders active in Great Britain have grown by more than 700%, and these litigation funders have amassed more than GPB 1.5 billion for investment in litigation.

Although the industry is a relatively young industry, it is clear that it is no longer in its infancy. Lord Justice Jackson completed a Review of Civil Litigation Costs in 2009. In the study he remarked, “…if the use of third party funding expands, then full statutory regulation may well be required”. That moment has arrived.

The market analysis shows that funders are predominantly active in high-value cases with claims of at least £3 million. They are diversifying their investments by financing competition, securities, property and arbitration cases as well as by offering new products such as global judgment enforcement. Some funders are even moving into personal injury cases or funding celebrity divorces. Not only is the industry widening its focus of investments, the funders are also increasingly globalised and interconnected. Funders from Australia and the US are teaming up with British counterparts. At the same time, British funders are financing cases around the world in Australia, New Zealand and Hong Kong. Another trend is that funders are increasingly financing portfolios of cases, grouping higher risk with lower risk claims. This might signal a first step towards the securitisation of claims.

Litigation funding in Great Britain is currently unregulated. There is merely a voluntary Code of Conduct, which was launched by the Association of Litigation Funders (ALF) in 2011. The code is inadequate, as only 7 of the estimated 25 litigation funders in Great Britain are members of the ALF. Furthermore, the code does not require public disclosure of funding or disclosure of funding to the courts and litigation opponents. Potential sanctions for violating the voluntary rules are limited to a GBP 500 fine which is payable to the ALF, and/or termination of the organisation’s membership. Overall, the sanctions for violating the voluntary code are trivial because the consequences for violation, or wrongdoings, do not restrict funders from continuing to fund claims.

The findings of the market analysis show that the litigation industry has expanded considerably, and the public’s concerns send a clear message to policymakers, regulators and the judiciary: it is time to re-evaluate the treatment of litigation fund arrangements to protect both consumers and companies before it is too late.

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