EU third-party litigation funding regulation delayed until further studies

The planned study and reported delay in moving forward the regulation came shortly after a report (29-page / 408KB PDF) by the International Legal Finance Association (ILFA), which criticised the parliament’s proposed rules for undermining the availability of legal finance in the EU and denying access to justice.

The ILFA’s main criticisms centred around a claimed lack of evidence or consultation with relevant stakeholders underlying the Voss report (28-page / 238KB PDF), which the proposed regulation was based on. The EU parliament voted in favour of the new regulation on third-party litigation funding (TPLF) last October and the proposals have been met with mixed response.

Two measures proposed by the draft regulation are of particular concern to funders, according to the ILFA. Firstly, there will be a 40% fee cap on the amount funders could recoup from damages awards in the event of a successful case. The association argued that the fee cap would make it “uneconomical for funders to side with smaller parties in complex and costly cases”, even where those claims are legitimate.

Secondly, the regulation intends to impose a duty on claimants to disclose third-party funding. The IFLA contested that mandatory disclosure will deter cases from being brought and benefit powerful corporate defendants.

In its report, the IFLA has asked the Commission to consult with key consumer rights groups and the European Innovation Council and SMEs Executive Agency on the impact of greater regulation of TPLF in EU member states. It said that any proposals on regulating the sector should be based on evidence which shows a need for EU intervention.

Litigation expert Emilie Jones of Pinsent Masons said the pause for reflection and further evidence-gathering will be welcomed by the litigation funding market, which has criticised what it perceives as a lack of evidence or consultation underlying the Voss report and resulting EU Parliament proposals.  

“On the other hand, businesses concerned about lack of regulation of litigation funding across the EU, and high returns to funders particularly in the mass actions space, will be keen to ensure that the mapping exercise and resulting assessment does move forward. This is an area in which there is a wide spectrum of views, often strongly held,” she added.

The IFLA, through its report, also called for delaying introducing any major changes to litigation funding until the  EU Representative Actions Directive (RAD) is fully transposed in all member states and has begun to bed in.

“While the ILFA report already cites a number of examples of funded mass actions in member states such as Germany, the Netherlands and Portugal, the implementation of the RAD represents a moment of significant change in the European mass actions landscape,” said Jones.

The RAD introduces minimum standards for consumer collective action procedures across the EU and is widely expected to drive an increase in European mass actions, particularly against consumer-facing businesses. Actions under the directive will be pursued by "qualified entities", such as consumer associations, who will, Jones said, need to work out their funding model.  

“Experience under the RAD will be very relevant to an assessment of the need for, and extent of, further safeguards around litigation funding,” said Jones. “The directive should have been operational in all member states from June 2023 but many member states are behind in their transposition steps, which in turn will delay the Commission's ability to conduct its assessment of the need for litigation funding reform in light of the ongoing mass actions developments.”

Last year, following the approval of the new regulation, the European parliament said that the Commission should monitor the development of TPLF in the member states and take the effects of the RAD into account once the deadline for its application had expired in June 2023. It is understood that the Commission will decide whether to submit a proposal for an EU directive to establish common TPLF minimum standards after the mapping exercise.

“The Commission's proposed mapping study of the European litigation funding landscape will undoubtedly take some time. This suggests that increased regulation of third-party litigation funding in the EU is still some way off,” said Jones.