Big collective actions, arbitrations and commercial claims, often requiring millions to pursue effectively, are juicy targets for litigation funders
Director Mohsin Patel comments on the future of litigation funding in The Times
With the market for lucrative legal claims rapidly expanding, Director Mohsin Patel explores how collective actions, arbitrations and commercial claims are increasingly appealing for litigation funders.
Mohsin’s comments were published in The Times, 16 February 2023, and can be found here.
“We are seeing a steep rise in collective action in the UK and across Europe. The seismic game-changer here was the Consumer Rights Act 2015. It brought in US style ‘opt out’ class actions for competition claims covering cartel conduct and abuse of dominant position. Stir in the accelerated use of the Group Litigation Order (GLO) regime, typified in the successful VW dieselgate cases, and the UK has become a highly attractive venue to launch class actions and group litigation.
“Big collective actions, arbitrations and commercial claims, often requiring millions to pursue effectively, are juicy targets for litigation funders. In a period of economic turmoil they’ve flocked to these cases which offer returns un-correlated to the wider market. Meanwhile, traditionally risk averse British lawyers who don’t have the war-chests needed to fund to these huge cases have welcomed the savvy, sophisticated and eager funders with open arms.’
Whether the pace and rate of interest will continue is anyone’s guess as interest rates rise sharply and other markets tempt funders with potentially better risk-adjusted rates of return and greater liquidity.
“There is a real debate as to whether litigation funding is suited to public markets given its inherent unpredictability in outcomes and duration. Markets often simply don’t understand litigation funding as a business and this can cause a mis-match between expectation and outcome.
“Most funder results aren’t public so it’s hard to build a concrete picture. Seasoned funders will tell you, with some notable exceptions, that outcomes are often ‘disappointing’. They end up investing more than expected at the start and returns take longer than they’d hoped. The general feeling is that litigation funding isn’t the ‘pot of gold’ people assume it is. Given the infancy of the industry however, as funders develop their track-record and investment expertise, these should improve.
“For decades, big corporates indulged in unlawful activity with impunity knowing that access to justice was effectively blocked. For ordinary individuals, litigation was both prohibitively expensive and immediately put them under threat of adverse costs because of the ‘loser pays’ principle. The coming together of ‘opt out’ class actions, litigation funding and after the event legal expenses insurance (ATE), has allowed groups of people bring claims and hold the big corporates to account. It has filled a democratic void.
“The big tech companies had a ten to twenty year start on both the regulators and the legislators. They probably knew that some of what they were doing to consumers was unlawful, but given the choice of building trillion-dollar companies or not, they inevitably chose to build them. Now they are taking some pain and being held to account in the form of multi-billion pound class actions, funded by the deep pockets of the litigation funders and with claimant groups protected by after-the-event (ATE) insurance.
“Funders, insurers and Brokers like Factor Risk Management are now a critical part of class action ecosystem that allows groups of people affected by unlawful activity to get access to justice. There are still only a finite number of investable cases being chased by the same capital. This benefits claimants by putting downward pressure on pricing, but leaves funders fighting over a limited pool of cases. Collective actions are showing no signs of slowing down and so supply and demand are equally matched for now at least.
“Specialist, agile funders are able to balance the spend needed to run a successful funding business with returning value to investors/shareholders. Right now, most funders operate on fund manager ‘2 & 20’ basis, which means that they must maintain an optimum level of operational expenditure (opex) vs funds under management in order to sustain and thrive. This is unlike the large publicly listed funders who can shoulder more significant opex with large teams of staff. I think that it is the specialist, agile, fund management style operators that will really thrive long-term.”