In Part 6 of its Final Report, the Civil Justice Council proposes to bring portfolio funding and litigation loans within the scope of formal regulation. This is a notable expansion, targeting not consumer-facing arrangements, but business-to-business lending between funders and law firms. While the aim is to address concerns arising from high-profile collapses of solicitors’ practices, the fit is not entirely natural. The problem may lie not with a lack of regulation, but with poor implementation of existing rules—and overly optimistic lending decisions. This blog explores what’s proposed, why it matters, and whether regulation is the right tool for the job.
Among the many proposals in the Civil Justice Council’s Final Report on litigation funding, those in Part 6 stand out as something of an outlier. Here, the Working Party turns its attention to two related forms of legal finance: portfolio funding and litigation loans. Neither involves direct funding of litigants. Instead, they are mechanisms by which third-party capital is provided to law firms. The concern is that these arrangements, while often commercially valuable, can lead to problems when firms overreach or collapse—leaving clients in the lurch.
Portfolio funding is a form of investment in which a third-party funder provides capital to a law firm across a portfolio of cases, rather than backing a single claim. The return to the funder is typically drawn from the aggregate proceeds of multiple cases, thereby spreading risk and potentially enhancing reward. These deals can be structured in various ways, but the common feature is that the capital is used flexibly—sometimes to underwrite disbursements, sometimes to support fees, sometimes to fund operational costs.
Litigation loans, by contrast, are usually case-specific credit arrangements. A lender, often a litigation funder or specialist finance house, loans money to a law firm to support a specific case or group action, with repayment contingent on recovery. Sometimes, the borrower is the client; more often, it is the firm. Interest rates may be high. Repayment structures vary. But again, the essence is that these are commercial credit arrangements between sophisticated parties, not consumer financial products.
Recommendations 28 to 31 address these forms of lending. The Report recommends that portfolio funding should be regulated as a form of loan finance, not litigation funding. The Financial Conduct Authority (FCA) should be responsible for this regulation. The Solicitors Regulation Authority (SRA) should investigate the impact of portfolio funding on the legal profession, with a view to improving guidance and oversight. The SRA and Legal Services Board (LSB) should explore co-regulatory models with the FCA. Additional training, guidance, and regulatory tools should be developed to assist lawyers involved in portfolio-funded work, especially where client protection is at stake.
These are measured suggestions. The Working Party stops short of suggesting that litigation loans should be banned or subject to the same framework as consumer-focused litigation funding. But it clearly signals that the existing regulatory regime is not working well.
The backdrop is plain enough. There have been a number of high-profile collapses of solicitors’ firms, some of which were heavily reliant on external funding. These include firms active in group litigation or low-margin, high-volume claims. In many cases, when the firm collapses, its clients are left without legal representation, disbursements unpaid, and prospects of recovery materially diminished. The loans are often non-recourse, but the damage is real. The courts, regulators, and press have all expressed concern about the impact on clients and the integrity of the justice system.
What’s notable is that this is not a consumer-facing problem. Portfolio funding and litigation loans are, by and large, business-to-business lending arrangements between funders and law firms. In England and Wales, such arrangements are usually not subject to financial regulation. The FCA regulates loans to consumers and small businesses under the Consumer Credit Act, but sophisticated commercial entities (including solicitors’ firms) fall outside its standard remit. There is no requirement to assess affordability or suitability. The parties are expected to be competent and well-advised.
That makes the CJC’s recommendation unusual. This is a call to bring commercial legal finance within the scope of formal regulatory oversight—not because the law firms need protection as borrowers, but because clients may suffer if the borrower collapses.
The potential benefits are obvious. Regulation could prevent unsustainable borrowing by requiring minimum capital adequacy or solvency standards. It could introduce risk controls that require funders to scrutinise the underlying cases more carefully. It could ensure better due diligence on the financial health of borrower firms. It could allow for greater transparency in the terms of lending and their implications for clients. In short, regulation might help prevent some of the collapses we’ve seen—or mitigate their consequences.
But there are problems too. First, regulation may not prevent failure. Law firms go under for all sorts of reasons—poor management, bad cases, uninsurable risk. Regulation may add cost, delay, and bureaucracy without addressing the root problem. Second, regulatory scope is hard to draw. At what point does a commercial loan to a law firm become “portfolio funding”? What about traditional bank lending? Or disbursement funding by insurers? The line between regulated and unregulated finance is porous.
More fundamentally, it’s not clear whether this is a problem of absent regulation, or of inadequate enforcement of existing rules. The SRA already has powers to investigate and intervene in firms that are financially unstable or act contrary to clients’ interests. If those powers have not been used effectively, the answer may lie in better oversight, not new rules.
The Report suggests the FCA is best placed to regulate the funders, given its role in supervising financial services. But it also sees a continuing role for the SRA, particularly in regulating the law firms themselves. In reality, there is a good argument that this is not a question of litigation funding at all. It is a professional regulation issue. Funders are commercial investors. Their conduct may be aggressive, but they do not owe duties to clients. Solicitors, by contrast, do. The question is whether firms are managing their financial obligations in a way that respects their professional duties. That is a matter for the SRA and the LSB.
This part of the Report, while important, feels somewhat separate from the rest. The CJC is grappling with third-party litigation funding as a mechanism to promote access to justice. Portfolio funding and litigation loans are more about the financial structure of legal businesses. They involve different relationships, different risks, and arguably, a different regulatory focus.
The concern may be better addressed by refining the SRA’s rules on financial management, and by ensuring that those who lend money into the legal sector are doing so with open eyes. If some funders are too ready to back high-risk firms without sufficient case analysis or contingency planning, that is a commercial risk they take. But the clients, who may have sound claims, are too often the collateral damage.
In truth, the challenge is one of discipline, not design. There is already a regulatory regime for solicitors. There are existing powers to monitor firm stability. And there are market signals that funders ignore at their peril. The issue may be less about new regulation and more about enforcing what we have—and asking hard questions of those who put short-term profit ahead of long-term viability.
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