The code of conduct: why it won’t work

Code of Conduct

In November 2011, a voluntary Code of Conduct was launched to govern third party litigation funders. The code implicitly acknowledges that litigation funding threatens to undermine consumer interests and foster litigation abuse, but fails to take the steps necessary to protect against such abuse.

The code:

• was prepared by a working party consisting primarily of representatives from the litigation funding and legal insurance industries, both of which stand to benefit from an explosion of litigation;
• fails to protect the client-lawyer relationship from excessive interference by third party funders;
• will be overseen by an association of litigation funders rather than an independent regulator;
• does nothing to regulate the conduct of those funders which choose not to join the association;
• lacks an effective enforcement mechanism to assure compliance with its provisions (the only potential sanction being expulsion from the association which oversees the code);
• does not ensure that people who enter into litigation funding agreements receive independent advice;
• does not require litigation funders to cover the other side’s costs in claims that funders have backed but which are found to be meritless;
• does nothing to prevent funders getting involved in settlement decisions, allowing them to obstruct settlements that might be in the claimants interest (e.g. an apology or a discount on future business) in favour of settlements that allow investors to harvest cash; and
• does nothing to prevent funders walking away from funding agreements during cases where they decide that claims are no longer commercially viable, regardless of the interests of the claimant.

Of grave concern is that nothing in the code – or indeed the current rules governing litigation in England and Wales – requires litigants even to disclose that they are using third party funding. This means that defendants might not even know that a claim ostensibly about righting an alleged wrong for a claimant has a major second goal: profit for a hidden investor that is steering the case from behind the scenes.

Read a full analysis of the problems with the Code of Conduct (PDF).

In order to ensure that claimants, businesses, and the UK legal system are protected from abuse, it is critical that the Government introduces strict regulation of the third party litigation funding industry.

A recent study from researchers from the Universities of Oxford and Lincoln concurred:

“Regulation will be necessary to control commercial activities, financial prudence and the reliability of the funding source, and to maintain the integrity of the legal system.”

Current oversight of the industry is limited to a voluntary code of conduct that is woefully inadequate.