Litigation Needs Better Regulation

Navigating the Complexities of Litigation Funding

Litigation funding, where third parties finance legal claims in exchange for a share of the proceeds, has become a significant industry in the UK, now valued at £2 billion. This market allows claimants, often underdogs facing high legal costs, to pursue justice without bearing the upfront financial burden. However, this practice raises ethical and regulatory concerns, particularly around potential conflicts of interest.

Mishcon de Reya’s Bold Move

In 2021, Mishcon de Reya, a prominent London law firm, entered into a £150 million joint venture with Harbour, one of the largest third-party funders. This collaboration aims to support cases handled by Mishcon, marking a significant step in the evolution of litigation funding. While this venture could enhance access to justice, it also prompts questions about conflict management and regulatory oversight​.

Benefits and Challenges

Litigation funders typically finance the initial costs of a claim, receiving a multiple of their investment from any eventual payout. This model can make the legal system more accessible, especially in a landscape where the expense of civil litigation can be prohibitive. For instance, legal battles often cost millions of pounds, deterring many from pursuing valid claims. Third-party funding can level the playing field, as seen in the case of sub-postmasters who overturned wrongful convictions with the backing of funder Therium.

Despite these advantages, the relationship between lawyers, clients, and funders is fraught with potential conflicts of interest. Lawyers must prioritise their clients’ best interests, uphold the rule of law, and fulfill their duty to the court. However, the interests of clients, law firms, and funders may not always align. The Solicitors Regulation Authority (SRA) mandates that lawyers manage these conflicts appropriately.

Regulatory Oversight

Mishcon de Reya’s joint venture with Harbour, while operationally separate, exemplifies the challenges of integrating funding with legal services. The firm plans to go public, adding shareholders to its list of stakeholders. Another London law firm, Rosenblatt, until the split from Luionfish, prohibited its Lionfish, from financing its cases to avoid conflicts.

Currently, litigation funders are not specifically regulated in the UK. Some hold Financial Conduct Authority (FCA) authorisation, but this does not cover litigation funding. The SRA can take action against lawyers for conflict mismanagement, but its fines are limited to £2,000, except in severe cases referred to a tribunal. Alternative business structures (ABS), which allow third-party stakes in law firms, face fines up to £250 million. However, ventures like Mishcon and Harbour’s are not classified as ABS, highlighting the need for clearer regulations.

Recent Developments

Since 2021, the litigation funding landscape has continued to evolve. There is ongoing debate about the need for more comprehensive regulation to ensure transparency and protect all parties involved. The industry’s growth underscores the importance of maintaining ethical standards and effective oversight to prevent conflicts of interest and ensure that justice remains the primary focus.

For more information, you can read the original article on the Financial Times website, and find additional insights on Law GazetteBBC NewsThe Guardian, and Legal Futures.