UK litigation funders have hit out at EU plans to regulate the sector in arguing the bloc’s proposals to cap fees could prevent class action lawsuits going forwards.
The EU’s proposal is clear the litigation funding sector has the potential to support access to justice and help ensure public cases are brought to court, by working to address the “significant economic imbalances that exist between corporations and those citizens seeking redress.”
However, it raises concerns the third-party financing sector lacks transparency and is unconstrained in its ability to demand excessive sums in return for services.
Specifically, the directive puts forward plans to cap litigation funders’ fees at 40 per cent of any winnings, in stating 60 per cent of any money won must be paid to the original claimants.
In turn, it seeks to block funders from taking control of proceedings to push for an outcome that benefits them financially, as it suggests funders may in some cases push for settlements that pay “the greatest return… in the shortest amount of time” against the interests of potential victims.
It also calls for new rules to ensure funders returns are proportionate to the investments they put in, as it suggests some financiers take away sums equivalent to 300 per cent of their original investments.
However, Tets Ishikawa, managing director at LionFish Litigation Finance, said “capping fees would hinder access to justice” in the EU if the directive goes into law, as he noted the plans are still at an “early stage”.
David Greene, a senior partner in Edwin Coe’s class action practice, said: “It is vital to leave it to the nascent market to determine pricing otherwise the more difficult public and consumer cases will not secure funding”.
Greene argued investors may simply begin shifting funds towards “safer investments” instead of taking the risk of backing a speculative case. He noted there is already “much competition” in the litigation funding market that “regulates pricing and returns.”
Aside from calling for a cap on fees, the directive says third party funders should also be responsible for any costs arising from unsuccessful litigation. The draft directive says litigation funders should be blocked from abandoning cases at any stage of the litigation process, therefore leaving claimants responsible for all costs.
It also calls for new rules ensuring any litigation financing agreements are disclosed to the court, as it raises concerns courts may award damages without being aware a share of that sum will be paid to a third-party financier.
Funders talking to City A.M. also raised concerns that the EU’s proposals are for the most part focused on collective and class action lawsuits, as they noted a large proportion of cases brought forward are on behalf of businesses and other sophisticated claimants who are in a better position to negotiate.
Gary Barnett, executive director of the International Legal Finance Association (ILFA) said: “Legal finance plays a critical role for European Union citizens and businesses seeking redress provided to them by law and protecting the effective administration of justice.