A leading think tank has issued warnings that the expansion of class action lawsuits in the UK is undermining trust in businesses as well as the legal environment.
The new report by the Adam Smith Institute (ASI) detailed that the increase in this form of litigation damaged the private sector’s confidence, as well as resulted in “enormous” settlement bills.
The ASI believed that the main beneficiaries of this legal trend have not been for individual claimants, but for claimant-focused law firms and third-party litigation funders.
Legislation was introduced in 2015 to allow an opt-out regime for infringements of competition law in the UK, as as a result, the Competition Appeal Tribunal (CAT) is one of the busiest Tribunals in the country.
City AM reported in August that as of 31 December 2023, the total claimed value of opt-out totalled €66.29bn (£56.32bn), which was up 48 per cent on 2022 figures.
The report pointed the finger at the third-party litigation funding industry for being behind the growth, adding its “primary goal of which is to profit from these lawsuits.”
Most litigation funders have argued that by providing funding it allows individuals, small businesses to have access to justice, that previously might not due to lack of funds.
Litigation is not cheap, from court fees to barrister and solicitors fees, a bill can quickly rack up.
However, the ASI argued that litigation funders typically back just two per cent to four per cent of the thousands of proposed cases, “often focusing on cases that offer the most profit rather than the most merit”.
As a result, report author Sam Bidwell argued that as investor confidence in the UK is already falling, the uncertainty created for businesses by the expansion of class action cases is a barrier to the recovery of that confidence moving forward.
What is ASI asking the government to do?
Bidwell has called for a consistent regulation of litigation funders, to hold the sector “to the same rules and standards as other investments”.
While asking to apply anti-money laundering regulations, to ensure litigation funders aren’t used as a loophole for financial fraud.
He has insisted that competition law should protect businesses from class actions while regulatory investigations are ongoing
Commenting on his own report, Bidwell stated that “the system is in dire need of reform.
“We must regulate third-party litigation funders on the same footing as other investments, and ensure greater transparency across the system,” he noted.
Adding, “we must reform our corporate law to ensure that it is fit for purpose, giving businesses greater responsibility for providing compensation if they fall foul of regulatory requirements.”