Raymond Cox QC of Fountain Court Chambers examines the current state of the UK litigation funding industry and the benefits a more mature funding market could bring.

It is of course very difficult to speak with confidence about the state of the litigation funding industry, and therefore about its prospects, because so little is publicly known about the cases accepted and rejected. That is knowledge understandably guarded by individual funders. Perhaps even more importantly, little is known about the untapped but available market of claimants.

For example, an obvious question, and area for research, is why, if it is accepted - as recent research suggests - that many cases suitable for funding which will in due course proceed to satisfactory settlements, judgments or awards, are not submitted to funders, that should be the position.

Crystal ball

It is perhaps helpful to begin by considering for a moment what life might like look in the UK if the litigation funding industry were more developed than now. More claimants would understand the costs risks of litigation and lay them off or accept them. More claimants with cases suitable for funding and who wished to obtain it, would do so. This would include those without financial means to bring the claim and those who wish to move the costs and risks off balance sheet; and those with claims big or small. The process would be well understood, straightforward and speedy. Methods of providing financial assistance would be tailored to the differing needs of claimants. More law firms would obtain a selected level of funding for portfolios of cases, and share in the risk and recoveries for selected cases.

For their part, funders would have many more cases, and have more confidence that adequate returns could be made from the enlarged portfolio. Funders would monitor risks closely, not interfere in the conduct of litigation and avoid unplanned-for liability to pay all of the other side's costs.

There seems to be no insuperable reason why such a situation will not evolve. In many ways the stars are already well aligned for the litigation funding industry. The Jackson Report has recently conferred legitimacy on the industry. There are plenty of potential investors in a low interest rate era looking for higher returns. The pressure from clients on law firms' costs remains high because costs remain high, and are liable to be shifted to unsuccessful claimants. None of that may be expected to change soon. In the meantime, the competition is down: conditional fee agreements are less attractive than before Jackson because the uplift cannot be recovered; and damages based agreements have not taken off.

Indeed, there have been some high profile new funded cases. These include the well-known claim by CF Partners against Barclays, and the claim by Tesco shareholders against the grocers. While there have been some well publicised problems these do not appear to be systemic. The failure of the funder Argentum is among these, although the reasons for that remain obscure. The Excalibur judgment caused much consternation but was perhaps exceptional when most funders naturally monitor the merits of cases with extreme care and obtain independent advice.

Finding the cases

And yet, despite the successes and the absence of hard data, it seems clear that, put simply, funders still struggle to find cases to fund. It appears that there are few cases funded compared to the total number of claims which are commenced in the courts, and certainly not as many as there are available funds. This is despite the fact that The Lawyer reported in February that two of the leading funders had experienced sharp rises in enquiries. At the same time the numbers of cases actually funded was cited as somewhere between 1 in 10 and 1 in 40.

These figures are striking. If correct, they suggest that, for all the perceived lack of understanding of funding options, many more clients do in fact seek funding than are successful in obtaining it. It seems odd that law firms and clients know enough about funding to deluge funders with requests for funding and yet there is a dearth of good cases to fund. It hardly seems likely that funders now receive all the cases which are suitable for funding. So why are cases which are suitable for funding not submitted to funders?

Assume a client with a perfect case for funding; maybe a claim for £10m, with very good prospects of success and enforcement, and likely legal costs of £1m. The claim is issued and settled, or a judgment or award is given and the £10m recovered. Presumably, if such a claim had been submitted to a funder before commencement it would have been funded with alacrity. It was perfect for funding. The vital question is why the client did not seek funding, and what if anything funders can do about it.

Although no doubt difficult to do, it would clearly be helpful for funders to research cases which match a desirable profile for funding (like the one above) and which proceed, without funding, to settlement, judgment or award, and satisfactory enforcement, and to find out why the clients did not seek funding.

Ignorance of the funding option is possible but perhaps not likely in view of the inundation of funders with requests. Clients and advisers may be assumed to act rationally even if mistakenly. It seems possible that the costs of funding are judged to be too high. The stronger the case the more likely that is. Clients may be put off if they (wrongly) believe they will lose control of the proceedings, or the funding options are not clear, or because of delay.

Fortunately, all of these matters are in the hands of the funders to control, including the costs of funding. The target for funders of being presented with good quality cases to fund is clear; the question is how they ensure that they are, and that is down to the funders' research, and determination to meet the needs of clients.

There are signs that the funding industry is changing and branching out into new ways to serve clients; into international business, arbitration, small cases and hybrid cases where the law firm shares the risk with the funder. These changes are undoubtedly important and will continue. But the success of the industry will depend on its abilities to meet the needs of the clients.

The author is grateful to Hefin Rees QC who commented on an earlier draft of this article.

Originally published in Funding In Focus, May 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.