The History and Attractiveness of Litigation Funding in the UK
Finance is a dynamic space in constant evolution. New products and new areas of investment regularly emerge, and as such capital allocators and investors must decide about the relative attractiveness of an ever-increasing and complex library of potential investment products. The best returns adjusted for risk are available to those able to identify and research early these emerging markets and products. The reward comes as a few years of excellent risk-adjusted returns, before an increasing amount of capital arbs away the investment opportunity. The once emerging market becomes mainstream and the innovative investor then needs to move onto something newer and potentially more attractive.
To understand the attractiveness of an investment in litigation funding, consider the following. According to Solomonic, a UK-based quantitative firm supporting litigation funders, almost exactly half of the UK commercial litigation claims are ruled in favour of the claimant. A litigation funder, in turn, would oftentimes ask a potential claimant to agree on compensation such that its payoff be at least 4 times the cost incurred. This means that for 2 pounds spent, 1 will be lost, and the second one will become 4 pounds, generating a 100% profit over the 2 pounds initially spent.
Litigation funding in the United Kingdom is therefore an emerging -and exciting- new area where outsized returns can be achieved by astute investors employing competent portfolio managers. Litigation funding in Great Britain should be traced back to the 1967 Criminal Law Act, a change in regulation that rendered Maintenance (Maintenance is about people who are not party to a legal case providing funding for that case) and Champetry (Maintenance for a profit) offenses with respect to public policy as neither tort nor crimes. The Act raised the possibility of litigation funding in certain circumstances, but a certain lack of clarity as to what these circumstances were meant that the rise of litigation funding in the country was curtailed- as it turns out, only for a few years.
In the 1990s, a series of law aiming at improving access to redress notably in favour of middle-income individuals that did not qualify for legal aid, abolished Maintenance and Champetry as torts and enabled lawyers to earn success fees in addition to their regular rates. This proved to be a turning point and litigation funding really took off on the back of that regulatory change. An important caveat to that was that the funder was not allowed to influence or manage the case, the client must remain in control. In the Group cases funded by the Katch Litigation Fund, this translates into the existence of a steering committee, which is a small group of individuals representing the claimants and that make all major decisions about the case.
In the years following the sea-change induced by the new laws around litigation funding, a series of major firms, such as Burford Capital (2009), Therium Capital Management (2009), Vannin Capital (2010), and Woodsford Litigation Funding (2010) emerged to take advantage of the improved funding backdrop. The burgeoning and fast-growing industry raised the question about whether the UK government should regulate third-party funding organizations or allow them to self-regulate. Self-regulation prevailed, with the understanding that should it fail, the government would have to step in and regulate.
In 2012 another milestone was achieved with the passage of the Legal Services Act, creating regulatory room for the development of “alternative business structures”. These alternative business structures permitted nonlawyer ownership of legal services organizations, thus allowing funders and law firms to form closer relationships, including funders investing in law firms and even starting law firms, as Burford did in 2016. As opportunities arose from the confluence of litigation finance and alternative business structures, UK law firms began to take advantage.
Today, the UK litigation finance market appears poised to continue growing. While data can be hard to come by, according to the 2018 Burford survey of law firm and in-house lawyers, 63 percent of UK respondents report “their organization’s use of legal finance has increased in the last two years.” This in essence means that more and more companies are going to ask litigation funders to support them, and the growing market will allow litigation funds to themselves grow and discriminates amongst more cases.