Baroness Bowles of Berkhamsted’s speech in the House of Lords this week, regarding a proposed amendment to the Financial Services and Markets Bill, was a crucial and rational call to action.
Baroness Bowles opened her speech with a warning about the current state of the system, adding that the need for urgent regulation “has been acknowledged by the previous and current Governments in commissioning the review. But a year has passed since the final report and we need fast delivery. At present, the sector is essentially self-regulated, which in practice means that it is unregulated.”
Baroness Bowless went on to propose an amendment which would put the regulation of litigation funders under the responsibility of the FCA. Adding that “litigation funding is not, in economic substance, a matter of court procedure. It is a financial product. It prices risk, transfers risk, pools capital and generates returns contingent on future events. That is the territory of the FCA.”
Baroness Bowles argues that the FCA is the appropriate organisation to take responsibility for the oversight, because of the financial risks involved. Crucially, Baroness Bowles notes that “if a funder collapses mid-litigation, consumers are stranded, solicitors are exposed, defendants face unregulated financial counterparties and mass claims markets become distorted. That is conduct risk, market integrity risk and transparency risk – all statutory FCA objectives.”
The speech also adds that choosing the FCA is expedient, “bringing litigation funding within the FSMA 2000 framework would create a set of common rules in an established regulatory system – one that already knows how to supervise complex financial and conduct risks.”
The message is clear, every other aspect of the financial system is regulated with expectations of transparency, resilience and accountability. Litigation funding, an area which carries considerable consumer involvement and risk, must be regulated accordingly.
Lady Bowles’ speech sets out a clear the direction of travel for such regulation. It is vital that government acts on the CJC review’s recommendations on litigation funding, and supports measures that protect Business and consumers from the risks associated.
Read the speech in full below.
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My Lords, my amendment proposes that the Treasury makes litigation funding a regulated activity, with a list of matters that I propose should be covered in the amendment.
Litigation funding has come into the spotlight for several reasons. There was the 2023 PACCAR decision, which held that litigation funding agreements were a form of damages-based agreement and unenforceable for failing to comply with the DBA regulations 2013. There has also been concern about the source of some litigation funding, especially when a significant proportion of funders who are active in this space are not headquartered in the United Kingdom and may utilise what can be described as dodgy derivatives.
The Conservative Government tried to address the PACCAR decision with a Bill that did not make it through the wash-up. They also proposed a wider review of litigation funding and asked the Civil Justice Council to assess whether the regime was effectively providing access to justice and whether regulation of commercial funders was necessary. An interim report and consultation were launched on 31 October 2024 and the final report was published on 2 June 2025. This was a substantial and diligent review with stakeholders across the spectrum, including litigation funders, welcoming and endorsing its recommendations. In December last year, the Labour Government made clear their intention to reverse the effect of the PACCAR judgment, so that litigation funding agreements would no longer be treated as damages-based agreements. At the same time, the Government said that they would take steps to regulate the third-party litigation funding sector—one of the central purposes of the review and its recommendations.
The issue is not whether there should be regulation but when and by what route. It is urgent. That urgency has been acknowledged by the previous and current Governments in commissioning the review. But a year has passed since the final report and we need fast delivery. At present, the sector is essentially self-regulated, which in practice means that it is unregulated. More than 70 funders operate in the UK, collectively deploying many billions. The Association of Litigation Funders covers only a small proportion of the market and cannot provide assurance about the rest.
The Solicitors Regulation Authority’s review of the mass claims market found that around half of firms provided no advice to clients about funding arrangements. Given the financial nature and the size of litigation funding, it is not appropriate for funders to remain outside the regulatory perimeter in an area with such wide-ranging consumer involvement and complex commercial incentives. Many claimants do not fully understand these arrangements, often entering them at moments of vulnerability. We do not allow this level of opacity for consumer loans or mortgages, and comparable safeguards should exist. We also need clear transparency about the capital itself: where it originates; how returns flow; who stands behind these vehicles; and how governance is structured. Some highly complex arrangements now support mass claims, involving crypto-related structures, sovereign capital, private investment vehicles and hedge fund money.
International capital is not inherently objectionable, but when it shapes litigation in our courts the present framework must provide assurance abut transparency, oversight and accountability. So, if regulated, who should take responsibility? The Civil Justice Council suggested that initial regulatory responsibility should rest with the Lord Chancellor. I understand why that was proposed, but I respectfully submit that the Financial Conduct Authority is better placed to do the job because litigation funding is not, in economic substance, a matter of court procedure. It is a financial product. It prices risk, transfers risk, pools capital and generates returns contingent on future events. That is the territory of the FCA. The funder’s return is contingent on the outcome of litigation. In any other context, that is the definition of a derivative. The FCA regulates every other form of contingent return instrument in the financial system; it is anomalous that this one sits outside the perimeter. Funders use financial risk models, portfolio diversification, capital adequacy calculations and probability weighted outcomes. They are not tools of the Lord Chancellor; they are the daily tools of financial regulation. The risks are financial risks. If a funder collapses mid-litigation, consumers are stranded, solicitors are exposed, defendants face unregulated financial counterparties and mass claims markets become distorted. That is conduct risk, market integrity risk and transparency risk—all statutory FCA objectives.
Internationally, litigation funding is treated as a financial service. Australia requires licensing, capital adequacy, disclosure and conflicts of management. Several EU jurisdictions treat it as alternative investment activity. The UK is the outlier. The Lord Chancellor regulates procedure, not capital markets. He has no supervisory teams, no prudential oversight, no conduct oversight and no jurisdiction over offshore capital. The FCA does. We already ask the FCA to regulate claims management companies, consumer credit used to finance claims and collective investment schemes. It is incoherent to regulate the periphery but leave the core funding mechanism outside the perimeter. This is the core expertise of the FCA.
To be clear, this does not turn solicitors into financial intermediaries. They are not selling a financial product; they are simply entering into commercial arrangements on behalf of clients. The funder is the entity offering the product, and it is the funder, not the solicitor, that should be subject to financial regulation. In fact, the SRA’s review, as I said, found that half of firms provided no advice about the funding arrangements. That is precisely why the FCA’s oversight is needed because solicitors are not acting as financial advisors and should not be expected to. The regulatory responsibility belongs with the body that supervises financial products, financial conduct and financial risk, and that is the FCA. This is not regulation of litigation; it is regulation of the commercial funding arrangements that sit behind it.
There is a further advantage. If we try to create an entirely new regulatory structure from scratch, there will inevitably be delay, duplication and further uncertainty. We would spend years arguing over architecture when what is needed now is a practical route to proper oversight. By contrast, bringing litigation funding within the FSMA 2000 framework would create a set of common rules in an established regulatory system—one that already knows how to supervise complex financial and conduct risks.
I do not suggest that every aspect of litigation funding should suddenly be treated as if it were a mortgage or an insurance product. Nor do I suggest that the courts would cease to play their essential role; they plainly would not. However, where commercial third-party funding is concerned, especially where consumer claims or collective proceedings are involved, it is surely no longer credible to pretend that this activity lies wholly outside the ordinary expectations of transparency, resilience and accountability that apply elsewhere in the financial system. The FCA is already being drawn into consumer harms arising in the wider claims market through the proposed further reform of the Consumer Credit Act, so it is hard to justify leaving a major part of the underlying funding structure wholly outside the perimeter. The FCA is the leading agency for financial conduct risk. At the bottom of this, what else is it?
This would be a practical way forward. It is possible that an even faster way forward or a stepping stone might be to make litigation funding a designated activity, but this issue cannot be left resolved. I beg to move.
