UK Government Seeks to Loosen Third Party Litigation Funding Regulation

On 19 March 2024, the Government followed through on a promise from the Ministry of Justice to introduce draft legislation to reverse the effect of  R (on the application of PACCAR Inc & Ors) v Competition Appeal Tribunal & Ors [2023] UKSC 28.  The effect of this ruling was discussed in our prior alert and follow on commentary discussing its effect on group competition litigation and initial government reform proposals. Should the bill pass, agreements to provide third party funding to litigation or advocacy services in England will no longer be required to comply with the Damages-Based Agreements Regulations 2013 (“DBA Regulations”) to be enforceable.

In the Litigation Funding Agreements (Enforceability) Bill, the Government proposes an expressly retroactive amendment to section 58AA of the Courts and Legal Services Act 1990.  It would exclude a “litigation funding agreement” from the requirements of a “damages-based agreement” and define a litigation funding agreement as follows:

(3A) For the purposes of this section a litigation funding agreement is an agreement which provides that—

(a) a person providing claims management services (“the funder”) is to fund (in whole or in part)—

(i) the provision of advocacy or litigation services (by someone other than the funder) to the recipient of the claims management services (“the litigant”), or

(ii) the payment of costs that the litigant may be required to pay to another person by virtue of a costs order, and

(b) the litigant is to make a payment to the funder in circumstances specified in the agreement.

The critical passage at proposed sub-section (3A)(a)(i) is the language “by someone other than the funder”.  The intent clearly is to carve out third party funding arrangements from the DBA Regulations, leaving only funding agreements entered into by the service providers (i.e. the lawyers) to be caught.  In the PACCAR judgment the Supreme Court had considered third party funding arrangements to be “claims management services” which could be caught by the “damages-based agreement” requirements.  This amendment would cut off defined litigation funding agreements from potential consideration as damages-based agreements for purposes of section 58AA and the DBA Regulations, meaning that they do not need to comply with the DBA Regulations to be enforceable.

Strictly, this amendment does not remove “claims management services” entirely from relevance to the DBA Regulations.  Any other form of that service as defined by section 419A of the Financial Services and Markets Act 2000 would still need to comply with the DBA Regulations if the remuneration for those services was “payment to be determined by reference to the amount of the financial benefit obtained” from a positive outcome of the claim for the litigating recipient of the services.

Further, funders should take note of the wider concept of “claims management activities” as prescribed under section 4(2)(e) Compensation Act 2006 and article 89 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.  Regardless of the proposed new position under this bill regarding compliance with the DBA Regulations, persons carrying on regulated claims management activities in the UK where they are not authorised to do so may be found guilty of a criminal offence under section 23 Financial Services and Markets Act 2000.

Given the simplicity of the bill, and public resonance for the benefits of third party funding for consumer class actions and other “David against Goliath” scenarios, we consider it not unreasonable that this reform could make it through Parliament before Parliament is dissolved in time for the next election, which election must take place by early 2025.

Meanwhile, the Digital Markets, Competition and Consumers Bill has nearly completed its progress through Parliament and so can be expected to become law; however, a previously proposed Government amendment to allow the use of litigation funding agreements in opt-out collective competition actions was rejected in Parliament.  Instead, according to a recent Ministry of Justice press release announcing plans for what has become the Litigation Funding Agreements (Enforceability) Bill, the Government suggested consultations on wider reform of litigation funding may commence.  As noted above, the pendency of an election may nevertheless forestall more comprehensive reform.