An overview of legal finance in England and Wales

On Monday 22 January, Burford Capital hosted a webinar on legal finance in England and Wales, which Macfarlanes was pleased to join.

The webinar, led by Macfarlanes’ finance partner, Malcolm Hitching, and Burford Capital’s vice president, Charlie Rooke, discussed the following four principal themes.

The history of legal finance in England and Wales

Over the years, legal finance has become a well-recognised feature of modern litigation in England and Wales, catering to a wide range of claimants, from large corporations to individuals. However, the sector is a relatively young one since for centuries third party funding was outlawed on public policy grounds by way of the torts of maintenance and champerty. 

The torts of maintenance and champerty considered that the involvement of interested third parties in litigation proceedings might “sully the purity of justice”, and accordingly the laws of England and Wales failed to recognise arrangements whereby litigation was funded or "maintained" by third parties. The key turning point, and the birth of the legal finance industry in England and Wales as it is known today, came with the implementation of the Jackson reforms. 

The Jackson reforms, the result of a government commission to Sir Rupert Jackson to prepare a report on the costs of litigation and potential areas of reform, largely came into force on 1 April 2013. Recognising that litigation in England and Wales was a sophisticated, complicated and lengthy process that involved significant cost and thus deterred a good number of claimants from bringing their claims, the Jackson reforms sought to give the impecunious claimant access to justice.  Jackson recommended a package of wide-ranging measures which impacted a number of areas of civil litigation, including costs and funding, and gave birth to “damage-based agreements” (DBAs).  Thanks to the Jackson reforms a lawyer could conduct litigation in return for a share of damages:  the door to third party funding and the ability for law firms to agree contingent fee deals (of a multiple of more than double fees) was thrown open and funders and law firms alike began to explore those opportunities. 

The regulatory regime governing legal finance and the funder/claimant relationship

The Jackson reforms provided the bedrock of the litigation funding landscape that we see today and led to the foundation of the Association of Litigation Funders (ALF) in 2011.  Jackson called for self-regulation of the legal funding sector and in response ALF was established as an independent body, delivering self-regulation of litigation funding in England and Wales. 

Notwithstanding the voluntary nature of ALF membership and adherence to the ALF code (Code), which details the standards with which all full funder members of ALF must comply, the Code is accepted by the courts in England and Wales as irrefutable standards that ought to be adhered to by funders providing legal finance. Accordingly, the Code permeates the legal finance sector and actively influences funder/claimant relations, whether or not the funder in question is a member of ALF. Among other things the Code provides that the funder shall:

• Clause 9.1: take reasonable steps to ensure that the funded party has received independent advice on the terms of the legal finance arrangement.
• Clause 9.2: not take any steps that cause or are likely to cause the funded party’s lawyers to act in breach of their professional duties; and
• Clause 9.3: not seek to influence the funded party’s lawyers to cede control or conduct of the dispute to the funder.

In the spirit of self-regulation, the Code reflects mutual respect between funder and claimant/funded party, recognising at its simplest that whilst a funder ought not to have the right to control or otherwise unduly influence legal proceedings, a claimant/funded party ought to afford that funder a sufficient level of respect, and at the very least a clear and unambiguous communication channel.

The use of legal finance by law firms and businesses

As the legal finance sector has matured, new capital has entered the market and transactional focus is evolving away from the traditional single case funding model.  Whilst high quality single cases will of course continue to be funded, increasingly this model is displaced by portfolio funding/law firm funding.  In such a case the funder effectively provides a loan to a law firm and takes security against the DBAs in place for each case and/or other assets of the law firm. 

This increased sophistication in funding models has been driven in part by the growing fragmentation of the legal market and a call for funding tools to facilitate change, including to establish new law firms, to fund law firm acquisitions, and to establish new divisions and offices of legal practices. The flip side of the trend for law firm amalgamation that dominated the legal sector in the first part of this century is the rise of the boutique specialist, and funders are facilitating that trend by providing facilities to fund law firm start-ups and boutiques. 

Long gone also are the days when legal finance was the domain of the claimant alone. Today funders offer defence side funding and a range of services through which corporate clients can tap into a funder’s contentious expertise, including assistance enforcing judgments/awards. 

Predictions for the future development of the legal finance industry 

The legal finance industry has developed at speed and is likely to continue to evolve in 2024 and beyond. Increased legislative focus on the sector is likely given funding’s central role in facilitating justice in the Post Office scandal, and we anticipate further judicial focus following the judgment of the Supreme Court in PACCAR.

In the near term we expect developments in the legal finance industry to be driven by:

• the use of AI: AI is gearing up to be an increasingly important tool in the legal finance industry, affording funders ready and in-depth access to information and data in respect of all manner of disputes. Funders will be able to use that data alongside predictive analytics to assist risk analysis and underwriting processes. It is also anticipated that AI will be instrumental in identifying opportunities in real time. Funders will become more adept at horizon scanning, for example spotting a regulatory threat, its potential impact and a prospective case and claimant ahead of the pack;
• moves to portfolio risk: moves to portfolio risk by funders will become more widespread;
• evolution in the legal sector: evolution in the legal sector toward boutiques and fragmentation will continue to have an impact on the legal finance industry and its financial needs;
• the secondary market: the continued evolution of the secondary market as funders look to de-lever themselves of risks (e.g., concentration risk); and
• an influx of new funders: sophisticated hedge funds and multi strategy investors will continue to join the specialist funders currently active in the sector.