Lord Hodgson of Astley Abbotts is a Conservative peer.

In order for our legal system to continue to command public confidence, it must be seen to be balanced, objective and transparent. Recent trends, however, have begun to put these values at risk. Solicitors seeking to represent claimants have begun American-style pursuit of claims. Equally concerning, centuries-old restrictions on third party involvement in litigation have been relaxed resulting in the emergence of third party litigation funding (TPLF).

TPLF is a form of financial speculation in which a third party with no connection to the dispute invests funds to cover the costs of litigation. In return for providing up-front funding for the litigation, the funder receives a substantial portion of the settlement or judgement if the case is successful – often 20 to 40 per cent – in addition to the return of their original investment. Litigation funding is notoriously secretive, and as a consequence it is not known how many funding firms are currently operating in England and Wales or their methods of operation.

However, the larger funding firms advertise and some are publicly traded. As a consequence, we know that the TPLF industry now has billions of pounds in assets under management worldwide and London appears to be one of the international funding hubs for these investors. Yet astonishingly, unlike other financial services, the industry operates under a voluntary code of conduct without any mandatory rules to safeguard against potential abuses.

Concerns about TPLF and its effect on civil justice have been identified and analysed in a new publication from the U.S. Chamber Institute for Legal Reform called “Before the Flood”. Its analysis is instructive.

It argues that, as a basic principle, the secrecy regarding funding arrangements is harmful to our justice system.  There appears to be a strong case for disclosure that will allow the court to ensure that awards have the effects intended by the court – that is to compensate a damaged party, rather than to compensate an undisclosed investor.

Other problems the report identifies include ethical concerns including the risk that because funders have the means and the incentive to control the litigation they fund, this may operate to a claimant’s disadvantage.  Because the funder’s sole interest is a return on their investment, their interest may prevent settlement when the matter might otherwise have been resolved at a lower and reasonable level or been resolved on a non-cash basis that would have been satisfactory to the claimant.

There is also the prospect that by removing risk for lawyers and their clients, funding can encourage meritless lawsuits to the defence of which a company has nevertheless to devote management time and expertise.

Funders are now beginning to show interest in smaller, consumer-based cases, and many are also supporting mass claims both within and outside the UK. Some funding firms are also providing financing for entire law firm litigation portfolios. Many of these lawsuits involve individual consumers who are less sophisticated may require more protection from TPLF abuses.

Common-sense safeguards are needed to protect consumers and to ensure that the civil justice system remains balanced, objective and transparent. These safeguards should include ensuring that funders have adequate capital to meet their obligations; putting limits on their ability to abandon the funding of cases, once committed; and mechanisms to address ethical dilemmas such as conflicts of interest and control of litigation decisions. Rules also need to be introduced ensuring full disclosure of any funding arrangements to the court.

There is a strong argument for a full parliamentary review of the extent of TPLF. This also could usefully consider potential safeguards, including transparency requirements, registration of funders and prohibition on funder control of proceedings.