The EU must regulate third party litigation funding, argues Axel Voss

We must not allow millions of European consumers and Europe's justice systems to become pawns in profit seeking, warns Legal Affairs Committee MEP
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By Axel Voss

Axel Voss (DE, EPP) is a member of Parliament’s Legal Affairs Committee

09 Dec 2021

There is a growing financial practice in Europe, which involves investing in lawsuits and arbitration proceedings in the hope of collecting a hefty share of the winnings. It is happening largely in the shadows. The practice is known as Third Party Litigation Funding (TPLF). Litigation funders identify cases with potentially large returns and typically pay the legal fees and other costs for the claimant, in return for a percentage of any award or judgement. 

Third Party Litigation Funding is largely unregulated in Europe, and most agreements are made in secret - rendering them ripe for abuse. Judges and defendants are often unaware that a claim involves a funder, what fees have been agreed, and what influence or conflicts of interest they may be.

In collective action lawsuits, consumers in the case may not know that a large percentage of their claim has been promised to a third party. TPLF contracts can also be worded so that funders are paid first, leaving greatly reduced compensation for claimants. 

Litigation funders say they offer access to justice for people who could not otherwise afford to bring cases. Yet if we listen to how funders describe themselves to their investors, providing ‘access to justice’ is clearly not their goal.

They pick and choose cases in order to achieve the best return on their investments. They mainly choose large-value lawsuits, while typically considering ordinary cases involving lower-value claims as too risky or not profitable enough.

“If we do nothing and allow the Third Party Litigation Funding industry to continue growing without putting robust safeguards in place, the risks are crystal clear”

Third Party Litigation Funding is swiftly becoming a highly profitable business in Europe. According to industry analyst Slingshot Capital, the global TPLF market is now worth between €40bn and €80bn. However, the lack of transparency renders it nearly impossible to know how much money they are making from European legal disputes.

The EU should not allow international finance firms to extract profits from European justice systems without any commonsense regulation and transparency. This is why I worked with my colleagues in the Legal Affairs Committee (JURI) to produce an own-initiative legislative report with recommendations for responsible private funding of litigation. 

Among the safeguards we propose are that funders be prohibited from taking control of legal proceedings or charging excessive fees; that all parties involved in the lawsuit should know a funder is backing the claim; and that a system of supervision be established to ensure that funders are subject to the same kind of oversight and transparency we would expect of any financial services firm. These proposals are not radical - and we have good reason to believe that European consumers want to see them enacted.

A recent survey of over 5000 Europeans in France, Germany, Netherlands, Poland, and Spain by research firm WorldThinks, found that 83 percent of consumers want safeguards for TPLF. The poll showed strong consumer support for specific safeguards to regulate funders, such as: 79 percent support a fiduciary duty for funders towards claimants, 78 percent want to keep funders from abandoning a case, 77 percent want limitations on fees, and 77 percent want funders (not claimants) to pay the costs of a lawsuit if their side loses. 

What Europeans do not support is the status quo: allowing funders to regulate themselves solely through voluntary codes of conduct. Only 31 percent think self-regulation is an acceptable practice for this industry. This could be because self-regulatory codes have proven meaningless, with no mechanism in place to ensure that funders fulfil their commitments.

Critics of TPLF regulation claim that we should wait and see how this industry develops in Europe before we intervene; I beg to differ. In my home country, the German lawyer association Deutscher Anwaltverein reported 21 litigation funders operating as of May 2021. From our own research, we have found that the number is nearly double today. We are seeing an astonishing rate of growth among funders. 

If we do nothing and allow the Third Party Litigation Funding industry to continue growing without putting robust safeguards in place, the risks are crystal clear. In Australia, where Third Party Litigation Funding was invented, a parliamentary report from December 2020 showed that funders regularly take profits far in excess of other financial companies - up to 500 percent return on investment in some cases. It described claimants in funded class actions as “the biggest losers” in the system, with significantly reduced compensation after the funders take their share. 

The 2020 Directive on representative actions includes some limited safeguards against abusive practices by litigation funders - but they are not enough. Those will only apply to claims brought under this new Directive, and not any other type of litigation or arbitration, or even collective actions brought under other laws.

We cannot allow millions of European consumers to become pawns in profit seeking - the EU must regulate TPLF. I urge my colleagues in the European Parliament and the Commission to support the report on responsible private funding of litigation. 

Read the most recent articles written by Axel Voss - 5G: Made in Europe

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