Legal sector responds to EU calls for regulation of third-party funders

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Wednesday, September 14, 2022 5:42 p.m.

Lawyers and litigation funders have hit back at EU plans to regulate the third-party litigation funding industry by saying new rules could limit access to justice.

The clashes come after the European Parliament voted overwhelmingly on Tuesday to adopt a report by German MEP Axel Voss calling for new regulation of Europe’s litigation funding industry.

Third-party funders fund lawsuits with a view to taking a share of the winnings.

The Voss report calls for fees and funder payments to be capped at a maximum of 40% of any winnings.

The report says third-party funders should also be required to cover defendants’ costs, including any adverse rulings, if litigation fails, while calling for greater transparency in the industry.

Commenting on the European Parliament’s approval, Voss, MEP for the German Christian Democratic Union, said regulation was needed to cap “astronomical and unwarranted litigation funder rewards”.

“We must ensure that our justice system continues to serve the people and is not exploited by profit-seeking actors,” Voss said, warning of the “recent and rapidly expanding global trend of hedge funds investing in legal proceedings in order to make huge profits off the backs of ordinary people.

However, litigation lawyers and funders speaking to City AM hit back at Voss’s proposals, arguing that the regulations would hinder the growth of the legal industry and limit access to justice.

David Greene, head of financial litigation at London law firm Edwin Coe, argued that “significant market competition” for third-party funding is already “regulating” prices in the sector.

Robert Hanna, managing director of litigation funder Augusta, said prices are also kept low by the relative sophistication of corporate clients, as he noted that a large portion of litigation funder clients are large corporations that ” know the price they are willing to pay”.

Hanna warned that regulation of the litigation funding industry could hamper the growth of the UK legal sector, in the face of “a huge opportunity for UK plc to be the jurisdiction of choice for commercial litigation”.

Julian Chamberlayne, a partner at Stewarts, said the regulations could “make it even more difficult” for the David v. Goliath class action lawsuits to progress, due to the costs associated with launching a major case against a well-funded corporation on behalf of of a disparate group of people.

Third-party funding, coupled with new laws allowing ‘opt-out’ lawsuits, has seen the UK become Europe’s top jurisdiction for class actions, including cases against big companies such as Apple and Mastercard

Greene said many class action lawsuits “would not be possible without the funding industry” due to the complexity of bringing a case on behalf of a potentially extremely large group of individuals.

Regulation in the EU could, however, further bolster the UK’s leading position as a hub for class actions, Chamberlayne said, as he suggested law firms could increasingly turn to the Britain to file claims.

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