Litigation funding is an exceptionally risky business — and current delays and uncertainty over new rules are making it worse, writes Leslie Perrin.

The UK's reputation as a leading destination for investment and a trusted jurisdiction for justice rests on legal frameworks that are both effective and predictable. It is against that backdrop that the government's recent light-touch proposals for the opt-out collective action regime are welcome. The recommendations, stemming from a Department for Business consultation on the opt-out regime, include measures geared toward faster distributions in successful class actions, better management of legal costs and procedural reforms.

This year marks a decade since the UK's very first opt-out collective action was filed in the Competition Appeal Tribunal (CAT), the specialist court that handles cases concerning opt-out claims, market mergers and economic disputes. The opt-out mechanism itself was created by the Consumer Rights Act 2015, under which claims proceed on behalf of all affected consumers and businesses unless they choose to opt out. In the ten years since, the tribunal's class action docket has grown to span sectors from payment cards and cars to trucks and foreign exchange benchmarks, with claimed amounts in individual cases running to billions of pounds.

Collective actions matter. They help ensure that competition law is enforceable in practice. They deter anti-competitive behaviour, promote fair competition and prevent businesses that break the rules from gaining an unfair advantage over those that comply. In that sense, the regime underpins both access to justice and confidence in fair and competitive markets across the UK.

None of this would be possible without investment in such cases, which comes from the third-party litigation funding industry. Yet despite its accepted importance in providing access to justice, the industry has faced considerable uncertainty in recent years. Funders are still waiting for the implementation of key recommendations made a year ago by the Civil Justice Council around returns on investments, as well as the government legislation that was promised to reverse the 2023 Supreme Court judgment known as PACCAR — a significant issue for the industry. PACCAR held that funding agreements which tie a funder's remuneration to the damages recovered fall within the statutory definition of damages-based agreements, making them unenforceable unless they comply with the relevant regulations; the promised legislation is intended to restore the pre-PACCAR position. The Civil Justice Council, the advisory body that helps shape reform of the civil justice system, recommended among other measures a voluntary cap on funders' returns, to be set by the industry through its own code of conduct.

A more immediate question, however, confronts the future of the opt-out regime itself: the Competition Appeal Tribunal's developing approach to litigation funding agreements, and a failure to appreciate the scale of the commercial risk undertaken by those who finance cases.

Funders commit substantial capital to investigate, certify and pursue claims that can take many years to resolve. In return, they receive an agreed share of any recovery if the claim succeeds; if it fails, they lose their investment. What is often overlooked is that funding collective proceedings is an exceptionally risky business, frequently beset by delays and complex legal matters. Funders must absorb significant upfront costs while always facing the genuine prospect that their entire investment could be lost.

That is why recent signals from the CAT are causing concern. The Tribunal appears increasingly willing to revisit funding arrangements and priority agreements when determining distributions, effectively reassessing returns after a case has concluded. The concept of "success" being applied remains uncertain and may depend on factors that were impossible to predict when the funding was first committed.

Capital is mobile. Investors will only deploy funds into litigation if the potential return reflects the risks undertaken. If returns become uncertain or unattractive, investment will flow elsewhere — and Britain is not the only venue on offer. Third-party litigation funding is long established in jurisdictions such as Australia, the Netherlands and the United States, giving funders alternative homes for their capital. No investment market can function effectively if agreements are liable to be substantially redrawn after the event. Funding arrangements are negotiated and priced according to risks assessed at the outset. If returns can be recalculated years later, uncertainty inevitably increases and funding becomes more expensive — and some claims may never be brought at all.

Just as scrutiny of the behaviour of big business is entirely appropriate, so too is scrutiny of funder returns. But there needs to be a level playing field. If the CAT wishes the regime to remain effective over the next decade and beyond, it must ensure that the risks taken to deliver access to justice are properly understood and respected. The open questions facing the regime are concrete enough: whether ministers bring forward the promised PACCAR legislation and implement the Civil Justice Council's recommendations, and how the CAT's approach to funding agreements settles into practice.

This is ultimately not just a debate about litigation funding. It is a test of whether Britain remains committed to the predictable, stable and investment-friendly legal framework on which access to justice and market confidence depend.

Leslie Perrin is the chairman of Calunius Capital.