Third Party Litigation Funding

Third Party Litigation Funding (TPLF) is an arrangement whereby a third party, who has no other connection to the litigation, finances some or all of a party's legal costs in return for a share of any proceeds of the litigation. In Europe, litigation funding is so far used for a broad range of claims. It sometimes includes taking on board liability for adverse cost rulings even though for that purpose after-the-event-insurance is more common.

Why

In June 2021, MEP Axel Voss presented a first draft of his legislative own-initiative report (INL) on “responsible private funding of litigation”. The report aims to establish a legislative framework at the European Union level to regulate the commercial practice of TPLF, ensure minimum standards for the protection of funded claimants, and prevent conflicts of interest, abusive litigation, and disproportionate allocation of monetary awards to litigation funders. The report seeks to address the lack of clarity and diverging rules and practices in different Member States, which can hinder the functioning of the internal market. This report launched the institutional process to evaluate further regulation of TPLF.

How

On 13 September 2022, the European Parliament adopted the legislative own-initiative report (INL) with a decisive cross-party majority. This vote served as a strong political message to the European Commission, urging them to address the growing global trend of hedge funds and other entities investing in legal proceedings to reap substantial profits at the expense of ordinary individuals seeking justice for wrongs suffered. While recognising the positive aspects of TPLF, the European Parliament put forward a set of safeguards aimed at effectively curbing activities of such investors that clearly go against the interests of claimants. Here are three examples of proposed safeguards:

• Implementing caps on excessively high and unjustifiable rewards offered by litigation funders to investors.
• Introducing an authorisation system overseen by supervisory authorities with the support of courts.
• Enhancing transparency by disclosing the involvement of funders along with funding agreements and making their activities more visible.

Through the proposed regulatory regime, the structures existing as partial and scattered safeguards would be reinforced with additional mechanisms to provide better protection for claimants.

Where do we stand

The following topics have emerged in 2023:

1. Representative Actions Directive transposition

For the national transposition of the Representative Actions Directive, certain EU member states have already decided to go beyond the limited - very generally held - safeguards of the Directive. Some examples on additional safeguards which can be found in the transposing national laws:

• Not more than 10% of total awards to funders (Germany)
• Cap on loan fees to the percentage of statutory interest on arrears (Slovenia)
• Disclosure of funding agreement to court (Bulgaria, Germany, Portugal)
• Disclosure of the beneficial owner behind funders required – Anti-Money Laundering / AML approach (Czech Republic)
• Declaration on the honour by Qualified Entity that action exclusively pursues consumer interests (France)
• No TPLF at all allowed (Greece)

 

2. Submissions to Irish Law Reform Commission on TPLF

EJF had the opportunity to support Kennedys Law on the finalization of their submission to Irish Law Reform Commission. Key takeaways:

• No self-regulation model, no recommendation of court certification, instead statutory exception, especially in the case of representative action.
• As establishment of a new regulator in the market’s early stage appears unlikely, the Central Bank is considered to become the most qualified regulator.
• Disclosure of third-party funding (TPF) and funder identity should be mandatory, and oversight is recommended to prevent funders from exerting excessive control.
• Mandatory provisions for TPF agreements, including disclosure of expenses, award share, and conflicts of interest are advocated for.
• Minimum capital requirements and a statutory declaration are proposed for funder insolvency while unilateral withdrawal by funders should be prohibited.
• The proposed mechanisms for managing under-compensation include capping returns on investment or allowing cost recovery.

The full version of the submission can be found here. EJF has in addition submitted its own contribution.

  3. EU Commission published research study on TPLF in March 2025

The objective of the study was to collect and analyse information on the legal framework and practical operation of TPLF in the European Union to facilitate a future policy choice of the Commission in this field, including in particular in relation to the elements of the EP resolution of September 2022.

The results of the study were published in March 2025 and showed that TPLF remains largely unregulated at the Union level, with significant variation across Member States. Most countries rely on general contract and civil procedure law. While TPLF is seen as a tool for improving access to justice, concerns over transparency, conflicts of interest, and lack of oversight persist.

Stakeholders are divided on whether to introduce EU-wide legislation, though momentum is increasing.

  4. Civil Justice Council concludes review of litigation funding in the UK

The final report of the Civil Justice Council (CJC) on Review of Litigation Funding in the UK, found that self-regulation of TPLF has failed, with weak competition and blurred lines between legal and financial control.

An important conclusion is that lawyer funding (Damage Based Agreements and Conditional Fee Agreements) and commercial funding are fundamentally different and should be regulated separately, but both returns must be subject to court approval.

Key recommendations include:

• Mandatory regulation of TPLF, with particular scrutiny of portfolio models and crowdfunding linked to financial gain, overseen by the Financial Conduct Authority  and Solicitors Regulation Authority.
• Standardised funding agreements, early court oversight, and stronger transparency to protect claimants.
• A publicly backed “Access to Justice Fund” (financed via a levy on funders’ and lawyers’ profits).
• A permanent Standing Committee on Litigation Funding within the Civil Procedure Rule Committee to collect data (to be provided also by funders), monitor trends and update standards in order to provide financial data on funding contracts and outcomes of court actions.

The UK review stresses the need to expand ombuds and regulatory redress mechanisms, especially for mass claims, as alternatives to litigation.

Based on EJF research, applying competition principles to mass claims could add another perspective.