Third party litigation funding in Europe: is regulation on the cards?

Following calls by the European Parliament for legislation to regulate third party litigation funding (TPLF) in 2022, the European Commission has published its long-awaited mapping study on TPLF.

The study, comprehensive at 706 pages, analyses the legal frameworks and practices of TPLF in EU Member States and selected non-EU countries (Switzerland, Canada, the UK and the US). It considers the feedback from a survey targeted at a range of stakeholders – including litigation funders, lawyers and law firms, businesses, consumer organisations, judiciary and academia – on the regulation and practical operation of TPLF in their respective jurisdictions. The study aims to inform future policy decisions around TPLF, including regulation.

The publication of the Commission's study coincides with the UK Civil Justice Council (CJC) Litigation Funding Working Group's ongoing review of litigation funding. As part of its review, the CJC published an interim report on litigation funding on 31 October 2024 alongside a consultation that sought feedback from stakeholders on a range of issues, including the extent to which TPLF is effective in securing access to justice, the risks and harms that may be associated with TPLF, and the regulatory options. The consultation closed on 5 March 2025. The feedback is expected to shape the CJC's recommendations on TPLF which it will be setting out in its full report, due for publication this summer. The government has indicated that it would wait for the CJC's review before considering legislation.

With TPLF having emerged as one of the most common mechanisms of litigation finance in the EU and UK, particularly within the realms of group litigation, the question of whether to regulate TPLF will soon reach a crucial juncture as both the EU and UK simultaneously complete their respective reviews on the state of play of this fast growing industry.

Mapping study highlights

The study was commissioned following the European Parliament's resolution of 13 September 2022 which called for the responsible funding of litigation. The 2022 resolution annexed a draft directive which set out a framework for an EU-wide rule regulating commercial TPLF.

The study illustrates how the growth of TPLF has spurred extensive debate among academics, practitioners and policymakers. Concerns include potential conflicts of interest, ethical issues, the risk of frivolous lawsuits and the need for regulation. These concerns echo those set out in the CJC's interim report on litigation.

Key takeaways from the study include:

No specific regulation of TPLF

There is no EU-specific regulation of TPLF, except for Article 10 of the Representative Actions Directive (RAD), the legislation that enables representative (group) actions to be brought by EU consumers affected by alleged infringements of EU law.

Article 10 provides that where a representative action is funded by a third party, conflicts of interests must be prevented and that funders should not influence the action in a way that would compromise consumer protection.

Differing approaches to TPLF legislation

The approach to TPLF legislation varies across the selected non-EU countries.

The report highlights the UK as having no existing legislation that directly addresses TPLF, with most guidance coming from the development of the common law on a case-by-case basis. The same is true for Canada. In the absence of specific legislation, national contract and civil procedure laws apply to TPLF practices.

In 2020, the Netherlands broadened its rules on collective actions (known as the Dutch Settlement of Large-scale Losses or Damage (Class Actions) Act) by adding a compensation component, enabling representative organisations to file collective actions for damages on an opt-out basis. A recent study commissioned by the Dutch Ministry of Justice revealed that TPLF has been employed in all compensation cases under the new rules. The Dutch courts have taken a more proactive approach by scrutinising particular clauses within TPLF agreements. This has led to increased transparency and oversight, with the courts occasionally recommending revisions or amendments to certain clauses. These suggestions have been adopted in subsequent stages of the proceedings, thereby offering a strong framework for regulating TPLF agreements.

Application of banking and financial regulation

All jurisdictions have existing banking and financial regulatory frameworks that impose specific conditions for authorisation, including capital adequacy, that could potentially apply to litigation funders, depending on their nature or structure. However, there are no reported issues arising from those regulations and TPLF specifically.

Stakeholders

Stakeholders hold diverse opinions regarding legislative intervention. Although there is a general agreement that regulation might be advantageous, there is a lack of unanimity on the specifics of what should be regulated and the methods of regulation. For instance, funders and consumer groups usually oppose stringent regulation at this point. BEUC, the European Consumer Organisation, highlighted in its recent report that TPLF is crucial for facilitating access to justice, especially in collective lawsuits. Conversely, businesses tend to support more rigorous regulatory measures.

Permissibility and qualification of TPLF

Most jurisdictions choose not to prohibit TPLF, save for Ireland where it is prohibited on grounds of maintenance and champerty. However, since 2023, TPLF has been permitted in Ireland for funding international commercial arbitration only.

Possible approaches to regulation

The study summarises the possible approaches to regulation based on results and data collated from the legal research undertaken.

No regulation: Those in favour of this position argue that there is no evidence of TPLF having a negative effect and that over-strict regulation could effectively stop TPLF activity and hinder access to justice. They consider that existing legal principles, together with the supervision of the courts and relevant authorities, are sufficient to regulate TPLF activity.

Light touch: Those supporting a more balanced approach consider that specific issues require regulation – including transparency and disclosure, financial regulation and consumer protection – with a view to enabling access to justice while safeguarding against abusive practices.

Strong regulation: Those preferring comprehensive regulation (exemplified in the annexed directive to the 2022 resolution) cite the negative impacts of TPLF, including conflicts of interests, undue influence by funders, reduction of compensation for claimants and increased legal costs. Stringent regulation would be seen to promote confidence in funders through transparency and legal certainty.

Osborne Clarke comment

The study reports that 58% of the survey respondents saw a need for regulation of TPLF compared with just 29% who saw no need. The remaining 13% either did not know whether it should be regulated, or did not answer.

A prior, separate study published by the European Law Institute (ELI) in October 2024 cautioned that prescriptive regulation of the litigation funding industry could restrict access to justice and that regulation “should either be to address an identifiable – and fixable – problem or to ensure consistency of best practice”. It recommends a light touch approach to regulation. Notably, the ELI’s study was co-chaired by Mrs Justice Sara Cockerill, a judge of the English Commercial Court and member of the CJC’s Working Group.

It will be interesting to see what approach both the EU and the UK ultimately take in relation to TPLF. To the extent that there may be divergence, businesses should prepare for a more complex litigation environment and the need for legal advice. For example, the viability of TPLF as well as variations in consumer protection regimes may influence the choice of jurisdiction in which to bring an action. Group actions are also often replicated across multiple jurisdictions.

Defendants will need to adapt their international defence strategy to be able to exploit the potentially differing requirements on claimants and therefore different bases for challenging funding arrangements. A combination of expert local knowledge and a coordinated multi-jurisdictional strategy is required to ensure consistency of argument while taking advantage of potentially beneficial local procedural rules. Multiple parallel actions give rise to a number of risks, including of negative precedents that can affect ongoing actions in other countries, but may also present opportunities for mitigating exposure, particularly through locally-tailored settlement strategies.

Looking ahead, it could take several months for the Commission to review the outcome of the study and make recommendations. It is anticipated that the Commission will need to account for Article 10 of the RAD (discussed above), given that TPLF is likely to be the primary mechanism of funding for representative actions.

In the UK, clarity on the direction of travel may be more imminent with the CJC's final report due to be published in the coming months.