UK Litigation Finance Regulation | Audley Capital

Introduction: How Is Litigation Finance Regulated?

Understanding the regulatory landscape is essential for anyone involved in litigation finance — whether as a funder, investor, law firm, or claimant. The UK's approach has evolved significantly since the abolition of the torts of champerty and maintenance, and continues to develop through case law and proposed legislation.

What Is the ALF Self-Regulatory Framework?

The Association of Litigation Funders (ALF) was established in 2011 following recommendations from the Civil Justice Council. It operates as a voluntary self-regulatory body with the following key requirements:

• Capital adequacy: Members must maintain a minimum of £5 million in capital available for funding.
• Code of conduct: Funders must not seek to influence the conduct of litigation or settlement decisions.
• Transparency: Funding arrangements must be disclosed to the court and, in some cases, to the opposing party.
• Complaints procedure: ALF provides a dispute resolution mechanism for complaints against members.
• Continuity of funding: Funders commit not to withdraw funding without reasonable cause.

While ALF membership is voluntary, most reputable UK funders are members, and courts increasingly expect funded parties to use ALF-compliant funders.

What Was the PACCAR Supreme Court Ruling?

In July 2023, the UK Supreme Court delivered its landmark ruling in R (on the application of PACCAR Inc) v Competition Appeal Tribunal. This decision sent shockwaves through the litigation finance industry.

• The question: Are Litigation Funding Agreements (LFAs) where the funder takes a percentage of damages classified as Damages-Based Agreements (DBAs)?
• The ruling: Yes. The Supreme Court held that such LFAs fall within the definition of DBAs under the Courts and Legal Services Act 1990.
• The consequence: LFAs structured as percentage-of-damages became subject to the DBA Regulations 2013, which most existing agreements did not comply with — rendering them potentially unenforceable.

What Are the DBA Regime Implications?

The DBA Regulations 2013 impose several requirements that most pre-PACCAR LFAs did not meet:

• Payment cap: The total payment under a DBA (including VAT) cannot exceed 50% of the sums recovered in most cases (35% in employment tribunal proceedings).
• Termination provisions: Specific rules govern what happens if the agreement is terminated before the case concludes.
• Hybrid agreements: The regulations restrict combining DBA payments with other forms of payment.

In response, the industry pivoted rapidly to multiple-of-invested-capital (MOIC) return structures, which are not caught by the DBA definition. Under a MOIC structure, the funder receives a fixed multiple (e.g., 3x) of their deployed capital rather than a percentage of the damages recovered.

What Legislative Reforms Have Been Proposed?

The Litigation Funding Agreements (Enforceability) Bill has been introduced to address the market disruption caused by PACCAR. Key provisions include:

• Retrospective effect: Existing LFAs would be deemed enforceable regardless of the PACCAR ruling.
• Prospective clarity: Future LFAs would be explicitly excluded from the DBA regime.
• Market stability: The bill aims to restore certainty and prevent the chilling effect on funding for access to justice claims.

The bill has received broad support from the legal profession, the judiciary, and the funding community. However, as of March 2026, it has not yet received Royal Assent, leaving the market in a state of regulatory uncertainty.

How Does UK Regulation Compare Globally?

The UK's approach differs significantly from other major markets:

• Australia: More prescriptive regulation — funders must hold an Australian Financial Services Licence (AFSL) and comply with managed investment scheme requirements.
• United States: No federal regulation; rules vary by state with some requiring disclosure of funding arrangements and others imposing no requirements at all.
• EU: The European Parliament has proposed a directive on litigation funding that could introduce mandatory licensing, capital requirements, and fee caps across member states.
• Singapore & Hong Kong: Both recently liberalised their frameworks to permit third-party funding for arbitration and certain court proceedings.

Conclusion

The UK's regulatory framework for litigation finance is at a pivotal moment. The tension between PACCAR's strict interpretation and the industry's practical need for flexible return structures is driving legislative reform. For funders, investors, and law firms, staying current with regulatory developments is essential.

For expert guidance on navigating the regulatory landscape, contact the Audley Capital team.