Changes could soon affect law firms using third-party litigation funding, as the Solicitors Regulation Authority (SRA) looks to introduce stronger safeguards following concerns about consumer protection, law firm stability and the collapse of several high-volume claims firms.
Why are changes being proposed?
Third-party litigation funding can help consumers pursue claims without paying costs upfront. However, the SRA has identified risks where funding arrangements may affect law firm stability, client outcomes and professional independence.
The concerns follow the collapse of firms including SSB Law in 2024 and PM Law Group, highlighting the need for greater oversight of funded consumer claims.
The SRA’s consultation reflects concerns that some high-volume consumer claims models have become heavily reliant on external funding, creating risks if funding arrangements change, claims volumes fall or firms become financially dependent on third parties.
The proposals cover more than client funding
A key aspect of the consultation is that it applies not only to funding arranged for clients, but also funding provided directly to law firms.
The SRA proposes regulating situations where solicitors “use and/or arrange third-party litigation funding”, covering three main models:
3 way (non-recourse) agreements
Under this model, a funder provides funding for a claim and only receives a return if the client’s claim succeeds. If the claim is unsuccessful, the funder generally loses the money advanced and receives no return.
Direct client-funder agreements
In these arrangements, the funder contracts directly with an individual client. Funding is typically used for disbursements connected with the claim, such as court fees or expert fees.
Working capital or portfolio funding
Under this model, a funder provides money directly to a law firm, often based on its existing or projected consumer claims work. The funding may be used for marketing, referral fees, expert costs, court fees or general business expenses. Unlike non-recourse arrangements, this type of funding is usually repayable by the law firm regardless of whether individual claims succeed. The funder may also take security over the firm or other forms of protection.
The SRA proposes using this broad definition of third-party litigation funding to reflect the changing nature of funding arrangements within the high-volume consumer claims sector. Working capital funding is a particular area of focus. The SRA’s concern is that firms could become financially dependent on this type of funding, creating pressure to increase claims volumes or difficulties if funding is withdrawn.
Exclusions
However, the proposals do not intend to capture all forms of borrowing or finance. The SRA proposes to exclude:
1. Regulated consumer credit agreements, ordinary business loans or commercial credit provided to law firms by banks or other financial institutions, and funding provided by an owner of an SRA-authorised law firm.
2. The proposed requirements apply only to “Consumer Claims”, which the SRA defines as claims brought by individuals against the same organisation or relating to the same issue.
Examples include:
• mis-sold car finance claims;
• unaffordable lending claims;
• data breach claims;
• diesel emissions claims;
• flight delay claims; and
• housing disrepair claims.
“Consumer Claims” includes not only court proceedings but also pre-action work and alternative dispute resolution processes, such as complaints to industry schemes or Ombudsman services.
3. Personal injury and clinical negligence claims;
4. Collective actions in the Competition Appeal Tribunal;
5. Work undertaken to defend consumer claims.
The SRA’s view is that these areas already have established regulatory and procedural frameworks, and it has not identified the same level of risk seen in high-volume consumer claims funded through third parties.
What new requirements could firms face?
The SRA has proposed five key measures:
1. Stronger professional standards
Firms would need to demonstrate that they:
• remain independent from funders;
• act in clients’ best interests;
• protect confidential information; and
• make clear that funders are not regulated by the SRA.
2. Clear funding information for clients
Firms handling funded consumer claims would need to provide clear information explaining the funding arrangement and alternative options, such as legal expenses insurance or other ways of pursuing a claim.
3. Greater reporting to the SRA
Firms may need to notify the regulator when they use or arrange litigation funding for consumer claims, allowing better monitoring of risks.
4. Risk management requirements
Firms would need to prepare a third-party litigation funding risk assessment and provide it to the SRA if requested.
5. Orderly closure planning
Firms would need plans explaining how they would protect clients and manage an orderly closure if financial difficulties arise. These plans would need regular review and approval by senior management.
A potential area for debate
The broad definition of working capital funding raises questions about where the line should be drawn between regulating litigation funding and regulating a firm’s general financial arrangements.
Loans from banks or other financial institutions are already excluded but some may argue that straightforward loans from other types of lender, where the lender has no influence over legal decisions and no relationship with clients, should not automatically be treated in the same way as client-facing litigation funding.
The SRA’s challenge will be ensuring that regulation targets genuine risks without unnecessarily restricting legitimate funding arrangements that allow consumers to access justice.
Looking ahead
The SRA’s proposals reflect growing concern about the risks associated with some litigation funding models. If introduced, the changes could mean greater transparency, increased reporting obligations and closer scrutiny for firms using funded claims models.
For consumers, the aim is to create a safer and clearer system when accessing funded legal services.
