Third-party funding concerns

The expanding market in third-party litigation funding needs greater regulation, according to an influential study, published this week.

Several third-party funders have launched in the last 10 years and US-style contingency fees, under which lawyers’ firms act as third-party funders, are due to be extended to personal injury claims by the Legal Aid, Sentencing and Punishment of Offenders Bill. Currently, contingency fees are permitted in tribunals in England and Wales.

A joint study by the universities of Oxford and Lincoln, Litigation Funding: Status and Issues, argues that greater transparency and effective regulation of third-party funding is required. It shows that, to date, nearly all claimants using third-party funding have been commercial clients rather than private individuals. It argues that self-regulation will not be enough to protect private individuals.

Co-author Christopher Hodges, head of the centre for socio-legal studies at Oxford University, says: “A third-party funder should be kept at arm’s length in the litigation process.

“For instance, funders should not determine the terms of a settlement. There is the danger that funders might opt for a lower settlement than the client might want in order to resolve a case quickly.

“Similarly, we do not want to see a situation where the third-party funder and a lawyer’s firm are in collusion against their client’s best interests. This does not appear to have happened yet in the UK, but we want to ensure that any risk of it happening in the future is removed.

“Clients need more legal protection as otherwise there is potential for third-party funders to control claimants’ cases for their own advantage.”

Co-author Dr Angus Nurse, now of Birmingham University, says: “The models of funding currently in use within the UK preserve the lawyer-client relationship, and our research found that funders currently exercise strict due diligence in selecting cases to fund in a way that provides for effective self-regulation of the market.

“But, as new entrants introduce different business models, the expansion in the funding may dictate a review of funding regulation to achieve both client protection and protection of the funding market itself. As a result, we consider that self-regulation may not be sustainable in the long-term.”