An inflexion point for litigation funding?

Litigation funding has an important but contentious role at the heart of the civil justice system. The law has tolerated its growth because it can open up access to justice for people who could not otherwise afford it. For international investors, though, it is first and foremost about profit, and by 2021 the UK market was estimated to be worth over £2 billion. The tensions here – between profit and justice, investor and victim – are nothing new, but they have become starker as the market has grown, notably through a proliferation of high-value class actions against large corporates across a range of sectors. These in turn have spawned a series of judgments, reports and consultations, culminating in proposals for far-reaching reform of the sector. In this climate of increased scrutiny, is the litigation funding market now at an inflexion point?

The evolution of litigation funding and current challenges

Thirty years ago, most third-party litigation funding was prohibited in England and Wales as a matter of public policy. Allowing third parties to profit from litigation in which they had no personal stake was thought to risk corrupting the justice system. The long decline of public funding for litigants helped change the public policy calculus. For many who could not otherwise afford to go to court, litigation funding became the only realistic option. Its reach has since extended across the civil justice system. As well as individuals and small businesses, funders work with multinational banks and private equity firms, and contract directly with claimant-focused law firms to fund portfolios of litigation. The range of funded claims has expanded too, from misstatements and non-disclosures by listed companies, to alleged competition law breaches, to mass tort claims, often in the ESG space. Because the overriding aim is to obtain the maximum return on investment, funders seek to build large claimant classes so as to enlarge the quantum of claims, generate publicity and increase pressure on defendants to settle. The legal foundation for litigation funding has never properly caught up with these changes. Rather than being set out in statute, rules have developed piecemeal in case law and by amendments to existing laws. The result is an opaque and incomplete system that operates according to practice as much as principle. Its fragility was exposed by the Supreme Court’s 2023 decision in PACCAR. In this case, a majority held that litigation funding agreements that entitled funders to a percentage of damages were, as a matter of law, damages-based agreements. The market had always assumed that these tightly regulated contingent fee arrangements could only be entered into by lawyers and their clients. The judgment rendered most litigation funding agreements unenforceable at a stroke and prompted a sector-wide reappraisal of risk and pricing.

Post-PACCAR, most funders adopted a new model for recoveries that entitled them to a multiple of their investment in the event a case succeeded. Some included a clause that would allow them to revert to their preferred percentage-based recovery, if the law was changed to permit it. Inevitably, defendants challenged these new arrangements, however in a recent decision, the Court of Appeal confirmed that they did not render litigation funding agreements unenforceable. Meanwhile, an increasing number of investors have sought to step outside the current regime by focusing on providing funding to law firms, rather than the underlying clients. Some have acquired equity stakes in firms and others have advanced or re-financed huge loans. In both cases, the aim is the same: to indirectly finance a portfolio of claims in order to spread risk and, potentially, extract very large returns.

These developments have been the context for a series of controversies in cases where funders’ returns appeared to dwarf the recoveries made by claimants for whose benefit the cases were allegedly brought, or where claimants have been left exposed to significant adverse costs liabilities. Litigation against the Post Office by former sub-postmasters was a prominent example. In the Merricks v Mastercard litigation in the Competition Appeal Tribunal (CAT), these tensions spilled over into a very public dispute between the funder and the class representative over the amount of the funder’s entitlement to a share of a settlement.

Reviews into litigation funding and opt-out collective proceedings

Against this background, the UK government initiated two reviews: one (started before the 2024 general election) by the Civil Justice Council (CJC) into the litigation funding market and reforms to its regulation and availability; the second (started early in 2025) by the Department for Business and Trade into the operation of the opt-out collective proceedings regime in the CAT.

The CJC, in a report published in summer 2025, made 58 recommendations to reform litigation funding. The most headline-grabbing was a proposed new law to reverse the effect of the PACCAR judgment, reviving the right of funders to agree returns calculated as a percentage of damages awards. Funders obviously welcomed this and are lobbying for its speedy enactment.

However, the CJC’s other recommendations would, if implemented, be equally significant – and not necessarily so favourable to funders. They start from the premise that litigation funding, when defined broadly, includes the range of relationships that funders, lawyers and litigants may enter into to share the risks and rewards of litigation. That approach is helpful because it highlights the interconnected nature of these relationships and the variety of ways in which cases are funded. For example, several recent ESG-focused mass tort claims are backed not by funders but by lawyers, acting on a no-win, no-fee basis. For defendants this presents a significant risk: if they defeat a claim, they may not be able to recover the often substantial legal costs they will have incurred – the individual claimants are impecunious and their lawyers cannot usually be made liable for a defendant’s costs.

As a baseline, the CJC proposes a regime of: (1) greater legal certainty by putting litigation funding on a clarified statutory footing; (2) greater stability by placing capital adequacy and anti-money laundering obligations on funders; and (3) greater transparency by requiring full and timely disclosure of the fact of funding and key contractual terms.

From there, the CJC recommends different levels of regulatory intervention depending on the nature and relative sophistication of the contracting parties: where consumers are contracting with litigation funders:

• funders should be subject to a duty akin to that imposed by the Financial Conduct Authority (FCA) where financial services firms contract with consumers;
• the court would be required to approve funding arrangements (including the funder’s proposed return) at the outset; and
• adverse costs insurance would be mandatory. However, the CJC declined to recommend extending the requirement for insurance to claimants who have no funder and are instead supported by a solicitor acting on a CFA. That lacuna will be of particular concern to potential defendants to the kinds of mass tort claims described above.

Separately, the CJC concluded that portfolio funding – the provision of finance to law firms to fund a range of cases – raises significant concerns and should be regulated by the FCA, not least to address concerns over the identity of funders, compliance with anti-money laundering regulation and capital adequacy. In circumstances where some law firms may have “developed high-risk and unstable business models that depend on unrealistically high levels of return”, the CJC proposed that the UK government investigate portfolio funding and consider the need for regulatory reform of the legal profession.

Conversely, where corporates are negotiating funding or risk-sharing arrangements, the CJC would liberalise the rules, for example by removing the caps on success fees that lawyers can claim on conditional fee agreements and damages-based agreements. Finally, where law firms enter portfolio funding arrangements with litigation funders, greater regulatory oversight, potentially involving the FCA working alongside the Solicitors Regulation Authority, would seek to better protect the interests of litigants.

The ten-year anniversary of the CAT’s opt-out collective proceedings regime has also led the UK government to review the operation of opt-out collective proceedings. Its primary aim is to determine whether the regime is delivering access to justice for consumers in a way that brings value without being unduly burdensome for business.

Among its key questions are whether funding agreements are fair and transparent, whether litigation costs influence competition among funders, and how the secondary market in litigation funding has developed in relation to transparency and confidentiality. The UK government acknowledges the overlap between its review and the CJC’s report and says it will consider them in the round.

Outlook for litigation funding in 2026

The potential for outsized returns on investment has turned litigation into a high risk, but (potentially) high return asset class. Limited regulation has facilitated explosive growth in the market and has allowed funders the flexibility to work around periodic challenges. So while the PACCAR judgment undoubtedly blunted the upside potential for funders backing class action claimants directly, funders have found new ways to deploy capital and maintain ambitious rates of return, notably through the growth of portfolio funding direct to claimant law firms. But the CJC’s proposals for reform, and the forthcoming conclusions of the UK government on opt-out collective actions, are likely to present a much more organised and significant challenge. On 17 December 2025, the UK government signalled that it would accept the CJC’s proposals to overturn PACCAR by statute and would “introduce proportionate regulation” of litigation funding agreements. If it follows the CJC’s proposals, that new system of regulation will prioritise market stability and transparency as a means of protecting consumers and other structurally weaker claimants, which may also indirectly benefit corporate defendants. But the precise shape and timing of any reforms will be crucial, and it is not clear if or when the CJC’s further recommendations, including several of key concern to defendants, such as in relation to portfolio funding will be taken forward. In the meantime, there remain grounds for funder (and claimant) optimism: English courts have shown themselves willing to continue to take jurisdiction over high-value international claims, and the recent claimant success in opt-out collective proceedings against Apple is tangible evidence that winning cases do exist.

That said, 2026 could be a year of consolidation in the funding market: assuming new consumer protection rules are introduced, it may lead to a structural decline in some high-volume claims, and increased transparency may lead to greater pricing pressure on funders. However, for the largest claims, the prospects of outsized returns are likely to outweigh the potential costs and increased regulatory burden. Potential defendants will be monitoring regulatory developments closely alongside expected substantive developments in the class action sphere, and could also look for opportunities to be involved in the change in the funding regulatory landscape.