Litigation funding continues to be a popular investment vehicle in the UK as the assets available to funders topped £2bn at the start of the decade. Bloomberg has noted that a “flood of money” was moving into the area. This trend appears likely to continue as funders are attracted to litigation as an investment vehicle as economic uncertainty persists and the post-COVID litigation landscape develops.
The early days of litigation funding were characterised by claimants using funding out of necessity to gain access to justice. However, the industry has developed over the last 10 years from a funding option for one-off cases to a genuine alternative to self-funding litigation. We now see upwards of 15 litigation funders operating regularly in the UK Market.
Class actions are a popular choice for funders
Although litigation funders have started to branch out into other areas including intellectual property and arbitration, it is clear that class actions continue to present the most significant chances of return for litigation funders, including under section 90A of the Financial Services and Markets Act 2020 (“FSMA”).
There is an increasing trend of litigation funders partnering with specific law firms with both Augusta Ventures Ltd and LCM announcing partnerships with litigation specialists as they look to invest further and target opportunities as they arise.
Class actions - the impact on the D&O Market
As far as the D&O market is concerned, this approach should not come as a great surprise as claimant firms have been monitoring stock-drops and the publication of deferred prosecution agreements for some time with a view to identifying potential class actions under section 90A of FSMA. These claims are typically pursued by institutional shareholders against companies for alleged misstatements made in published material. Whilst the terms of any D&O policy will need to be reviewed carefully, often these claims engage “side C” of a D&O Policy and therefore significant defence costs may need to be advanced by Insurers.
In supporting class actions under section 90A of FSMA, litigation funders are generally unconcerned with the difficulties that claimants face in being successful in s90A claims (as set out here in respect of the Tesco litigation) and instead are focussed on maximising the potential recoveries from any Policyholder. In doing so, claimants and funders often seek to advance speculative headline claims designed to encourage Policyholders to engage in early resolution with the claimants rather than incurring significant defence costs in rectifying the deficiencies in the claim. If an early resolution is not reached, the claimants’ costs can quickly become a significant barrier to settlement.
Insolvency claims are a growth area for litigation funders
The challenging economic climate has resulted in a record number of insolvencies in the UK – 14,048 registered insolvencies in 2021, up from 12,634 in 2020 – and this is expected to increase by the end of 2022.
On administration or liquidation, the insolvency practitioner (IP) appointed is required to consider directors’ conduct and, if necessary, pursue claims against the directors to recover sums for creditors. These claims typically arise from the Insolvency Act 1986 and the Companies Act 2006 and include allegations of wrongful trading and breaches of director duties respectively.
Viable claims, which may not have been pursued previously due to the insolvent company’s lack of financial resources, are now been pursued against directors, and their insurers, with the backing of litigation finance. The litigation funder will in some cases purchase the claim and effectively have the rights of the IP assigned to them. In other cases, they will work with the IP together for a percentage of the recovery.
Litigation funders have the resources to pursue claims aggressively through litigation, and often with claim values inflated to recover their outlay and make a profit (along with recovering losses for the creditors). As a result, D&O claims and defence costs are higher than may have otherwise been the case. This means policy limits will be eroded more swiftly, possibly resulting in directors being left without cover at a later stage in the proceedings.
Developments in the EU
Looking slightly further afield, there are circa 50 litigation funders operating in EU Member States at the moment. The EU has kept a keen eye on the impact of litigation funding and class actions in Australia, Canada, the Netherlands, the UK and the USA which led to the European Parliament’s recent approval of a Directive on Litigation Funding.
Whereas litigation funders in the UK are self-regulated by the Association of Litigation Funders, the European Parliament’s recent move to introduce greater regulation of litigation funding is based on its’ observations of the apparent issues with litigation funding. The paper presented to the European Parliament specifically cites the concerns of the Australian Parliament that “the level of power and influence litigation funders have in class actions gives rise to situations where their financial interests trump those of the representative plaintiff and class members.”
The draft report to the European Parliament focuses on the protection of claimants and was welcomed by the German Federal Bar.
The draft report was approved by the European Parliament and the EU Directive recommends:
- a system for authorising litigation funders before they are allowed to enter the market;
- the establishment of a fiduciary duty from litigation funders to claimants;
- litigation funders should be prevented from abandoning litigation at any stage in the litigation process; and
- claimants should recover a minimum of 60% of damages paid to the claimants.
It will be interesting to see how the EU Directive is received and whether it leads to further regulation from the European Parliament and other legislatures.
In the meantime though, it is likely that litigation funding will play a significant part in the post-COVID claims landscape in the UK.