Litigation Funding Reforms: Clarity for UK Funders and Litigants Post-PACCAR

On 2 June 2025 the Civil Justice Council (a UK public body that advises on civil justice and civil procedure) (“CJC”) issued its Review of Litigation Funding Final Report (the “Report”). The CJC has provided comprehensive recommendations on the regulation and reform of litigation funding in England and Wales. The highlight recommendation of the Report is for the UK Government to remove third party litigation funding from the regulations and requirements of the Damages-Based Agreements Regulations 2013 (“DBA Regulations”), reversing the judgment of the Supreme Court in PACCAR.^[1] Meanwhile, the UK Court of Appeal has recently endorsed a position that the Competition Appeal Tribunal (“CAT”) may order that third party funders of collective proceedings be paid first from litigation proceeds before claimants according to waterfall provisions in their funding agreements.

The Report in total makes 58 recommendations regarding:

• the introduction of a light-touch regulatory regime for third party funding of litigation (but not arbitration) in England including money-laundering checks and capital adequacy requirements;
• changes to the conduct and availability of collective action proceedings; and
• the regulation of alternative fee arrangements for lawyers in the jurisdiction.

Last year, the UK’s Labour government set aside a bill which would have effectively implemented the Report’s recommendation to reverse PACCAR (see further here). It remains to be seen if that bill is swiftly revived.

Whether waterfalls are compliant with the DBA Regulations is a further matter on appeal to be heard in June 2025, and remains a live issue unless and until legislation conforming to the CJC’s recommendation goes into effect.

Litigation Funding Regulatory Reform Proposals

As well as the headline recommendation to reverse PACCAR, the Report proposes the introduction of a formal regulatory scheme for litigation funding. Such regulation is recommended to be very light touch for funding provided to commercial entities. An extra layer of consumer funding regulation is recommended to address:

• a regulatory consumer duty on litigation funders when funding consumers or collective proceedings; and
• requiring independent legal advice for funded parties and court approval of funding agreements in certain cases.

The CJC is not proposing that litigation funders come under the eye of the UK’s financial regulator, the Financial Conduct Authority (“FCA”) generally, but that funders should be required to adhere to anti-money laundering regulations and capital adequacy requirements.

The regulatory landscape is recommended to be put on a statutory footing for English litigation, but not for English arbitration.

The Report also recommends a statutory approach to prohibit litigation funders from controlling funded litigation. Funders are already prohibited under common law principles from controlling litigation (e.g. instructing lawyers, or controlling settlement), but the lines regarding where control begins can be blurry.

Recommendations for Court Rules: Funding Notification and Procedural Requirements

Currently, the existence of funding arrangements may be required to be disclosed on a case-by-case basis, most particularly in circumstances of CAT proceedings where it may be necessary to demonstrate the financial viability of the claim, and in other litigation in the context of security for costs.

In this context, the CJC recommends revisions to Civil Procedure Rules Part 19 to align with CAT Rules for collective proceedings, including notice requirements for funded claims. The Report also recommends consideration of the development of a Pre-Action Protocol for mass claims and enhanced costs management for funded claims.

Special Recommendations for Consumer Portfolio Funding

One area the Report recommended for more concerted regulation is consumer portfolio funding, which is the package funding of small claims consumer litigation by law firms. There have been situations were law firms handling such matters have gone bust leaving their clients with adverse costs bills. The Report recommends the regulation of such portfolio funding as a form of loan by the FCA and the investigation of the impact of portfolio funding on the legal profession with a view to potential regulatory reforms.

Litigation and Arbitration Costs and Third-Party Funding

At present, the finance costs of litigation funding are not recoverable in English litigation (although they may be under an English arbitration). The English Arbitration Act was recently updated, and we commented previously on distinctions in the costs consequences of litigation and arbitration funding as well as the status of arbitration in England generally. The Report recommends permitting the recoverability of litigation funding costs in exceptional circumstances to promote access to justice, slightly rebalancing that distinction.

Equally, the Report makes recommendations which should come as a relief to funders regarding their own adverse costs exposure in litigation. The Report recommends the continuation of the Chapelgate^[2] approach of allowing case-by-case assessment of funder liability for adverse costs. Further, the Report rejects the possibility of a presumption of security for costs against funders, relying on the proposal for capital adequacy regulation, and proposed after-the-event insurance requirements, instead. It would remain that funders have no costs exposure in arbitration.

Reform of Conditional Fee Agreements (CFAs) and Damages-Based Agreements (DBAs)

The CJC recommends that the Lord Chancellor issue new regulations regarding litigation funding agreements (“LFA”) permitting hybrid CFA-DBA funding arrangements and clarifying their legality. As to the DBA Regulations, the Report recommends implementing the Mulheron-Bacon proposals arising from a report prepared in October 2019. Broadly, those proposals intended to make DBAs more flexible.

The Report also suggests that an independent dispute resolution process for disputes between funders and funded parties be created.

Finally, the Report recommends allowing DBAs in opt-out collective proceedings in the CAT, subject to court approval of the lawyer’s return. We note a provision to achieve this had been included in the draft Digital Markets, Competition and Consumers Bill early last year, but was removed during debate before the bill was enacted. Parliament may have more appetite for the recommendation in the context of wider reform – the proposal was ancillary to disparate concerns in that bill.

Court of Appeal and CAT Give Some Guidance to Funders of Collective Actions

There has also been a recent evolution of the principles under which litigation funding operates in the current regime.

In a 16 April 2025 judgment in Gutmann v Apple Inc & Ors, a combined appeal heard earlier this year for several collective proceedings, the Court of Appeal considered related questions in relation to their LFA arrangements.

The Court of Appeal declared that the CAT has the power to order waterfalls (where the funder is paid out of damages or settlement proceeds prior to the class claimants), and therefore class representatives have the power to agree waterfalls in LFAs (pending further CAT approval of the settlement terms). In the particular case, the Court of Appeal found that the issue could not be dealt with in the abstract, but when the settlement proposal was actually analyzed; in the first instance the LFA has specific provision requiring the class representative to act “fairly and justly in the best interests of class members.”

Subsequent to this approval in principle, the CAT has shown its willingness to guarantee amounts for funders of collective proceedings but also to alter settlement deal terms. In a 20 May 2025 judgment, the CAT approved a settlement in the Merrick v Mastercard consumer interchange fees collective action which broke the payment sum into three ring-fenced buckets, similar to a waterfall approach but not ensuring the funder would receive an uplift as well as its actual costs. The funder had previously disputed the prudence of the overall settlement deal, which was for £200 million and drastically lower than the original claim. The approved settlement potentially gave the funder a return of 1.5 times, which was significantly lower than initially estimated by the funder, although still ring-fencing £45 million of the settlement as guaranteed for the funder and £100 million guaranteed towards paying class claimants.

The CAT concluded that its “approach to settlement set out in this judgment is determined by the exceptional circumstances of this case, where the settlement is at an extraordinarily low proportion (under 1.5%) of the claim as originally advanced in 2016, and under 1.2% of the claim as revised in late 2022.”

Owing to the unusual resistance to the deal from the funder, the CAT also “consider[ed] that an application for a [collective settlement approval order], just like an application without notice for an injunction or freezing order in the High Court, should in future have a section specifically addressing full and frank disclosure, setting out and addressing the arguments that might be raised objecting to the proposed settlement.”

Timeline to Reform

As noted above, in 2024 there was a short bill which would have effectively reversed the PACCAR ruling but which did not make it to final enactment in the closing days of the Conservative government. Further, the bill did not feature in the King’s Speech for the new Labour government, with the CJC review announced instead. Enacting the top recommendation of the CJC Report by reviving the bill would be a quick first step taken before the Parliamentary summer recess in August 2025.

However, the Report recommends that all necessary legislative reforms be consolidated into a single Litigation Funding, Courts and Redress Act for clarity and accessibility. That is a practical step for the long term, of course, but could easily delay enactment of the core reform of removing third party funding from the DBA Regulations regime until at least 2026.