Litigation funders introduce £2m minimum capital requirement

Contentious new rules introduced by the Association of Litigation Funders (ALF) will see third-party funders required to hold £2m in capital to fund cases, despite the fact that most ALF members say that figure impractical.

The new rules introduced by the ALF this week are designed to crack down on rogue funders in the market and make litigation funding easier to police.

But even ALF chairman Leslie Perrin said that £2m would “absolutely not” be enough to cover the portfolio of cases taken on by high-profile funders.

Members say the amount is not designed as a capital adequacy test and is designed to prevent brokers claiming to have funds trying to join the association and capital adequacy standards.

But it is the only amount specified for funders. Capital adequacy rules specify that funders must have “maintain at all times adequate financial resources to meet its obligations to fund all of the disputes that it has agreed to fund” but do not state a figure.

Several of the eight members signed up to the voluntary code say that amount is higher than £2m, which would not be enough to cover potential losses.

Perrin said that his own fund, Calunius Capital, had put in place far higher capital reserves but to raise the bar for the ALF risked deterring new members.

“The £2m is not to present barriers that are anti competitive,” he said. “We’d like these funders which have small budgets to come into the ALF but if we keep putting the minimum capital up they could argue that they want to come in but we’re putting up this barrier.”

Those wanting to join the ALF must pay a subscription fee of £10,000, which, another source claimed, was enough to put off smaller funders.

Harbour Litigation founder Susan Dunn said the onus should be on litigants to check funders had enough cash in their reserves before setting up deals.

She said: “The thing to make sure is that they recognise the fact that £2m gets you into the association but advisers must be asking the funder how much funding have you got, how may cases are you committed to, how much leverage are you using in your fund. 

“We’ve said you’ve verified you’ve got £2m but users need to understand how that all works, you’re not absolving the end user or their adviser from verifying what the exposure is of the funder.”

She added: “We would never risk more than 10 per cent of our fund on one case and it’s good to have that discipline because things can always go wrong.”

Calunius announced the closure of its second fund in January, adding £30m of capital and meaning it now advises funds totalling £70m in large scale commercial litigation and arbitrations.

New rules will also bind together funds’ associated and subsidiary entities in a bid to prevent funders avoiding complaints by pinning the blame on a subsidiary company. The new code has replaced the team ‘funder’ with “funder’s subsidiary or associated entity”.

Dunn said: “The danger is that you contract with a company and they say ’it’s X who provides the money’, and if something were to go wrong it’s the fund who’s misbehaved, and if we didn’t have the process under these new rules you might not able to deal with that complaint.”

Litigation funders, which use private money to bankroll portfolios of litigation, have been in the market for several years but have been the focus of much debate since the Jackson Reforms were implemented in April 2013.

The first voluntary code was published in November 2011 out of a Civil Justice Council (CJC) working group on litigation funding chaired by Irwin Mitchell senior partner Michael Napier (24 November 2011).

The ALF was created out of the working group and Lord Justice Jackson said in a lecture on 23 November 2011 he expected solicitors to only enter agreements with litigation funders signed up to the code.

Just eight funders have joined the voluntary organisation, including Calunius Capital, who’s head Leslie Perrin chairs the association, listed-funder Burford, Harbour, and Vannin Capital.