Status

This guidance is to help you understand your obligations and how to comply with them. We will have regard to it when exercising our regulatory functions.

Who is this guidance for?

This guidance is for all SRA-regulated firms, solicitors, registered European lawyers, registered foreign lawyers and registered Swiss lawyers, individuals involved in using or arranging third-party litigation funding (TPLF).

Any reference to solicitors in this guidance also includes registered European, foreign and Swiss lawyers.

Purpose of this guidance

The purpose of this guidance is to help you understand how you can use third-party litigation funding in a way that complies with our Standards and Regulations. This includes funding or financing client litigation or introducing clients to third-party funders (funders).

Standards and Regulations

SRA Principles

In general, if you are using or are considering using TPLF, the relevant SRA Principles are that you must act:

• in a way that upholds the constitutional principle of the rule of law, and the proper administration of justice (Principle 1)
• in a way that upholds public trust and confidence in the solicitors' profession and in legal services provided by authorised persons (Principle 2)
• with independence (Principle 3)
• with integrity (Principle 5)
• in the best interests of each client (Principle 7).

Other regulatory requirements

Our standards and requirements are, amongst other things, aimed at ensuring public trust and confidence in the profession.

Relevant requirements from the Code of Conduct for Solicitors, RELs, RFLs and RSLs, and from the Code of Conduct for Firms are that you must:

• keep and maintain records to demonstrate compliance with your obligations under the SRA's regulatory arrangements (paragraph 2.2 of the Code of Conduct for Firms)
• actively monitor your financial stability and business viability and, once you are aware that you will cease to operate, effect the orderly wind-down of your activities (paragraph 2.4 of the Code of Conduct for Firms)
• identify, monitor and manage all material risks to your business, including those which may arise from your connected practices (paragraph 2.5 of the Code of Conduct for Firms)
• co-operate with us, other regulators, ombudsmen, and those bodies with a role overseeing and supervising the delivery of, or investigating concerns in relation to, legal services (paragraph 3.2 of the Code of Conduct for Firms)
• notify us promptly of any indicators of serious financial difficulty relating to you (paragraph 3.6 of the Code of Conduct for Firms)
• ensure that the service you provide to clients is competent and delivered in a timely manner, and takes account of your client's attributes, needs and circumstances (paragraph 4.2 of the Code of Conduct for Firms and paragraphs 3.2 and 3.4 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs)
• in respect of any referral of your client to a funder, inform the client of any financial or other interest which you have in making the referral and any fee sharing arrangement relevant to the client's matter (paragraph 5.1 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs and note also paragraphs 5.2 and 5.3)
• not act if there is an own interest conflict or a conflict of interest or a significant risk of such a conflict (paragraphs 6.1 and 6.2 of the Code of Conduct for Firms and paragraphs 6.1 and 6.2 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs)
• keep the affairs of current and former clients confidential unless disclosure is required or permitted by law or the client consents (paragraph 6.3 of the Code of Conduct for Firms and paragraph 6.3 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs)
• take all reasonable steps if you are a compliance officer to meet the obligations set out in paragraph 9.1 of the Code of Conduct for Firms (for compliance officers for legal practice) and paragraph 9.2 of the Code of Conduct for Firms (for compliance officers for finance and administration)
• give clients information in a way they can understand and ensure they are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them (paragraph 8.6 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs).

What is TPLF?

Where clients are unable or unwilling to self-fund legal action, TPLF might be an option to manage the legal costs associated with pursuing a claim. For the purposes of this guidance, we define TPLF as being an arrangement involving a funder, who is independent of both the claimant and their law firm, providing funding to cover some or all of those costs. TPLF arrangements might be made between the funder, the law firm and the claimant, between the funder and the claimant, or between the funder and the law firm.

Within this overall definition, TPLF covers a range of funding models and the terminology used to describe these arrangements is not applied consistently across the market. The sector is also rapidly evolving with frequent development of new funding models. We therefore outline some of the main approaches we have encountered. This is intended to provide further context for this guidance.

We see TPLF used across a range of civil claims, including consumer claims, commercial litigation, and employment claims. Firms involved in high volume consumer claims or group litigation orders sometimes use TPLF. These cases typically involve large numbers of low-value claims where firms or consumers may be unwilling or unable to fund litigation themselves, for example diesel vehicle emissions claims.

In relation to consumer claims, the three broad third-party funding types we see firms use are:

• 'non-recourse agreements' between funder, firm and client. The funder provides funding for the claim and receives a return only if the client's claim is successful. The return may be a fixed sum, calculated by reference to the funded sum, or by reference to the costs. If the claim is unsuccessful the funder loses the funded sum and receives nothing
• 'direct client-funder agreements'. The funder enters into an agreement with an individual named client. Funding is typically provided for disbursements (expenditure by a law firm in relation to a client's claim, for example Court fees or expert fees). These direct client-funder agreements are typically a form of non-recourse agreement where the funder only receives a return if the client's claim is successful. The client has an individual contractual obligation to the funder
• 'working capital funding’, which is also referred to as 'portfolio funding'. The funder provides funds to a law firm, which typically has significant discretion in how to use the funds. For example, funds may be used to pay marketing costs and referral fees used to assist the firm in attracting clients. The provision and amount of funding is determined by reference to the firm's current or projected consumer claims work. Factors such as expected claims volumes, prospects of success, claims duration and profitability are used by the funder to decide whether to lend, and the amount of funding to be provided. Often the draw-down of funds is dependent on the volume of claims the law firm opens. Typically, this is 'recourse funding', so the law firm is obliged to repay the funding, usually with interest, regardless of the outcome of client claims. In this situation, the funder may take a charge over the assets of the firm by way of security.

Entering into TPLF arrangements

Before you or your client sign up to a TPLF arrangement, you must assess whether the proposed arrangement, including its specific type and terms, is consistent with your regulatory duties in all the relevant circumstances. You should also carry out this assessment if you are considering taking on a client who is already signed up to a TPLF arrangement (for example, in the context of a proposed transfer of client files from another law firm).

This means that you should assess whether a TPLF arrangement would be in the best interests of your client (SRA Principle 7). If you conclude that it would be, you should also assess what type of TPLF arrangement would be in your client's best interests.

You should also consider (among other things) whether the arrangement:

• is compatible with upholding the rule of law and the proper administration of justice (SRA Principle 1)
• will uphold public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons (SRA Principle 2)
• will preserve your independence (SRA Principle 3).

The following sections provide guidance on financial stability and resilience, the service you provide to clients, independence and managing conflicts of interest, client confidentiality and legal professional privilege and the risk of financial crime.

Making sure TPLF arrangements do not undermine your financial stability and resilience or the service you provide to clients

Any TPLF arrangement you enter into with a funder involves, or is likely to involve, inherent financial risk, which must be appropriately managed. Any risk to your firm’s financial stability may lead to a significant risk of consumer detriment and raise wider regulatory concerns.

Both recourse and non-recourse TPLF arrangements can create financial pressures. For example, this may happen if:

• a funder does not fulfil their obligations to provide agreed levels of funding
• the firm has inappropriately managed its cashflow
• the funding arrangement does not provide for sufficient funds.

In the case of a TPLF arrangement that is recourse-based, you must make sure you can meet your liabilities as they fall due. If not, this can pose risks to your firm’s financial stability where unable to meet your liabilities. This could happen when the outcome of litigation is not as anticipated (for example, where a claim is unsuccessful or takes longer to resolve than expected).

Where a TPLF arrangement is provided on a per client basis or via portfolio funding, the way the funding is structured may incentivise you to consider taking on client claims that are unmeritorious or to take on more client claims than you can manage effectively, particularly for consumer claims. This can create an own interest conflict, or a significant risk of such a conflict (see paragraph 6.1 of the Code of Conduct for Firms) and might lead to potentially unsustainable case volumes. The latter could compromise your ability to provide a competent and timely service to each individual client. As a result, you risk breaching:

• SRA Principles 2, 5 and 7
• paragraph 3.2 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs
• paragraph 4.2 of the Code of Conduct for Firms.

You should be aware of your regulatory obligations to:

• actively monitor your financial stability and business viability and, once you are aware that you will cease to operate, effect the orderly wind-down of your activities (see paragraph 2.4 of the Code of Conduct for Firms)
• identify, monitor and manage all material risks to your business, including those which may arise from your connected practices (see paragraph 2.5 of the Code of Conduct for Firms)
• notify the SRA promptly of any indicators of serious financial difficulty relating to you (see paragraph 3.6 of the Code of Conduct for Firms).

Before entering into any TPLF arrangement, you may wish to consider the following questions. What you need to consider will depend on the circumstances and nature of the arrangement and you may also need to consider additional questions. You may wish to seek expert financial advice.

• Can you maintain enough capital resources and liquidity to meet your liabilities under the TPLF arrangement as they fall due? You should maintain this level of financial resilience at all times, including during periods of liquidity stress. You should make sure you continue to meet your obligations under any other funding arrangements you have entered into. You should also have processes in place to identify, assess, monitor and manage risks to both your liquidity and capital adequacy. For example, if you operate in the consumer claims sector, you may wish to use risk assessments and stress testing to understand how different claim outcomes could affect your financial position. You may wish to develop contingency plans in case the outcome of a claim differs from what was anticipated, or if it becomes apparent that a particular type of claim cannot be taken forward. To enable any action needed to mitigate risks to be taken in good time, you may also wish to identify early warning signs of adverse outcomes, such as a reduction in client numbers or the early abandonment of client claims.
• Have you adopted governance processes that support sound financial risk management? You should make sure your senior management and, where applicable, your Board have adequate oversight of your financial position. Your compliance officers should be in a position to meet their obligations under paragraphs 9.1 and 9.2 of the Code of Conduct for Firms with respect to your financial position. You should review your financial position and your risk appetite regularly. Smaller firms may do this by putting clear reporting processes in place and seeking independent financial advice where needed. Your governance structure should make sure there is clear accountability for financial decisions, including those relating to TPLF.
• Does the funder have appropriate capital adequacy and liquidity? As part of your compliance with paragraph 2.5 of the Code of Conduct for Firms, you may wish to obtain evidence that funders are maintaining sufficient levels of capital and liquidity to fulfil their obligations under any TPLF arrangements. Conducting due diligence on funders may provide you with valuable insights into their funding sources, their financial status, and their funding history. This could for example include reviewing independent credit ratings, analysing available annual reports, making enquiries about the source of funds, and looking at the funder’s history of financing litigation.
• Consider diversifying sources of funding. If you rely on a single source of TPLF you may be exposed to increased financial risk if your sole funder is unable to meet its obligations. You may wish to consider whether you should diversify your sources of revenue and funding, in a manner proportionate to your own level of financial exposure and risk tolerance, as well as that of your clients.
• Could the arrangement incentivise you to take on an unsustainable case volume? Your obligation to act in the best interests of each client, not to act if there is or is a significant risk of an own interest conflict, and to provide a competent and timely service to each client, applies regardless of any incentives you may have under any TPLF arrangement.

Ongoing management of legal and financial risk related to TPLF

You have an obligation under paragraph 2.5 of the Code of Conduct for Firms to monitor and manage all material risks to your business. This requires you to take a proactive and ongoing approach to identifying, overseeing and mitigating risks that could affect you or your clients. In the context of TPLF, and the potential impact it can have on your firm’s financial resilience, you may wish to:

• keep any TPLF arrangements under review. You should consider carrying out a regular review of TPLF arrangements to assess any ongoing risks and identify any new or emerging risks that may signal a need to make changes to those arrangements
• keep under review the case for diversifying sources of funding. If you have decided to rely on a single source of TPLF you may wish to keep under review the case for diversifying your sources of funding in a manner proportionate to your own level of financial exposure and risk tolerance, as well as that of your clients
• maintain ongoing dialogue with funders. You should, as necessary, communicate regularly with your funders to make sure they continue to demonstrate the expected level of commitment and financial capability to meet the terms of your TPLF agreements. You should also make sure you fully understand your obligations under your TPLF agreements and have the processes in place to meet those obligations at all times. For example, any requirement to provide regular case updates
• maintain clear records detailing how TPLF has been used. As part of your compliance with paragraph 2.2 of the Code of Conduct for Firms, you may wish to maintain a clear audit trail demonstrating how TPLF has been used in line with the purposes set out in the terms of your TPLF agreements. This may help to mitigate any risk of funding being withdrawn on the basis that those terms have not been met. You may also wish to maintain clear records of your communications with funders
• keep your firm’s own behaviours under review. In particular you should make sure that your firm is not taking on an unsustainable case volume, regardless of any incentives you may have under any TPLF arrangement.

If you use TPLF we expect you to be able to produce evidence to show that you have taken steps to assess and mitigate the risks of TPLF to your business consistent with your obligations under paragraph 2.2 of the Code of Conduct for Firms. For example, a written TPLF risk assessment carried out before the firm receives any funds from the funder. As part of your compliance with paragraph 2.4 of the Code of Conduct for Firms, you may wish to consider what evidence you have of processes in place to assess, monitor and manage those risks. For example, stress testing, scenario modelling and contingency planning, including planning for an orderly wind-down of your activities should that become necessary.

You should notify us promptly of any indicators of serious financial difficulty (paragraph 3.6 of the Code of Conduct for Firms), in a manner that is open and transparent. Depending on your business and financial arrangements, indicators of financial difficulty may include:

• concerns as to cashflow
• increased debt-to-income or debt-to-equity ratios
• the need to seek additional funding to manage working capital expenses
• late and missed payments to creditors
• reliance on overdraft facilities.

You should also notify us if you are considering seeking advice from an insolvency practitioner. Financial difficulties should be reported to us.

Preserving independence and managing conflicts of interest when using TPLF

Sometimes the incentives of funders, firms and clients will be aligned. In other cases, the incentives may be less well aligned, and funders may have different interests to those of your clients whose litigation is being funded. For example, a commercial funder may prioritise making a return on their investment in the litigation, whereas your client may prioritise securing justice above any financial outcome.

In addition, TPLF can give rise to conflicts between the interests of two or more of your clients. You must not act in relation to a matter, or an aspect of it, where there is a conflict of interest or a significant risk of one between clients, unless the limited exceptions and conditions in paragraph 6.2 of the Code of Conduct for Firms and paragraph 6.2 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs are met. These exceptions and conditions (including the potential need for you to put in place effective safeguards to protect your clients’ confidential information) are discussed in our guidance on conflicts of interest.

You must act in the best interests of each client and with independence (see SRA Principles 3 and 7). To comply with your regulatory obligations (including, but not limited to, SRA Principles 3 and 7), you should make sure funders cannot:

• influence or control the conduct of client litigation under any TPLF arrangement in a way that is inconsistent with your regulatory obligations
• directly or indirectly make or influence decisions about the litigation in a way that is inconsistent with your regulatory obligations.

You should be mindful of the common law rules against maintenance and champerty which may result in a TPLF arrangement being contrary to public policy and unenforceable where a funder has excessive control over funded litigation.

Examples of poor practice that amount to potential misconduct we have seen, and which must be avoided, include TPLF agreements which permit funders to influence the following matters in ways which could compromise your independence, your duty to your client or your wider regulatory obligations:

• staffing and operational decisions
• settlement decisions
• wider financial decisions of your firm, such as the order in which creditors are repaid.

You should make sure the terms of the agreement governing a TPLF arrangement do not create avenues for a funder to exercise influence or control over client litigation in a way that is inconsistent with your regulatory obligations, ether immediately or at a future point.

Protecting client confidentiality and legal professional privilege when using TPLF

TPLF arrangements usually require you or your client to share information about the claim with the funder, both before funding is agreed (so the funder can assess the claim) and during the litigation (for example, through case updates required under the TPLF agreement). This raises two distinct issues you must consider:

• you must keep the affairs of current and former clients confidential unless disclosure is required or permitted by law or the client consents (paragraph 6.3 of the Code of Conduct for Firms and paragraph 6.3 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs)
• legal professional privilege.

You need to have appropriate arrangements in place to help you meet your obligations in relation to confidentiality which should take into account the distinction between those obligations and legal professional privilege. See our guidance on confidentiality of client information for further information.

Making sure TPLF does not facilitate financial crime or sanctions breaches

Current limitations in the regulation of TPLF may make it a potential target for criminals seeking to launder the proceeds of criminal activity.

Litigation as an area of legal practice does not itself fall within the scope of the Money Laundering, Terrorist Financing and Transfer of Funds (Information of the Payer) Regulations 2017. Nonetheless, all firms and activities remain subject to the Proceeds of Crime Act 2002 (PoCA). In the context of TPLF this could include:

• concealing, disguising, converting or transferring criminal property (s.327)
• removing criminal property from the UK (s.327)
• entering into or becoming concerned in an arrangement which a solicitor or firm knows, or suspects, facilitates (by whatever means) the acquisition, retention, use, or control of, criminal property by or on behalf of another person (s.328)
• acquiring, using, or having possession of criminal property (s.329).

You have an obligation to identify, monitor and manage all material risks to your business, including those arising from connected practices (see paragraph 2.5 of the Code of Conduct for Firms). You must also act in a way that upholds public trust and confidence in the legal profession (see SRA Principle 2). This includes managing the risks associated with funders using TPLF as a vehicle for transmitting the proceeds of crime.

You may also be at risk of breaching the UK Sanctions Regime if you receive money from, or engage with, a person or entity subject to sanctions, or an entity owned or controlled by them. You could breach the UK Sanctions Regime by dealing with these assets, for example by accepting and paying out assets subject to a freezing order. See our sanctions guidance for further information and guidance on the due diligence checks you should carry out.

Our Proceeds of Crime guidance sets out further details on how you can prevent the risk of financial crime, and the steps you should take where you are concerned that financial crime has been attempted or occurred.

Some funders are based outside of the UK, including in jurisdictions where ownership and control may be difficult to establish. One of the examples in our Proceeds of Crime guidance of a potential warning sign that someone is trying to use your firm to obscure the origin of proceeds of crime is involvement with jurisdictions, or clients based in jurisdictions, which are known to be:

• subject to international sanctions
• tax havens
• subject to corruption or political unrest
• centres of the illegal drugs trade or terrorism.

In this context, you may also wish to consider the status of any other third parties who may receive disbursements from TPLF funding, such as After The Event insurance providers or expert witnesses.

We have seen cases where funding provided under TPLF arrangements has been rapidly paid out to other entities with ownership or other links to the funder. This circular or opaque movement of funds can present financial crime risks and may expose you to the risk of breaching PoCA and your regulatory obligations.

Introducing a client to a funder where this is in the client's best interests

As outlined above, where TPLF is being considered, you should always assess whether, and in what form, a TPLF arrangement would be in the best interests of your client (see SRA Principle 7).

An arrangement between you and the funder may, in some circumstances, reduce the risk a client would otherwise face by entering into a TPLF agreement directly. For example, in the case of consumer claims, those risks may include the need for the client to understand potentially complex contractual terms, as well as their obligations and potential liabilities arising under the TPLF agreement with the funder.

There may be circumstances in which you conclude it is in the client's best interests for you to introduce them to a funder. Whether or not you decide to make an introduction, it is good practice to maintain a written record of your decision, including the reasons for it, consistent with your obligations under paragraph 2.2 of the Code of Conduct for Firms. It is important that any communications introducing a client to a funder are clear, fair, and not misleading.

Where you introduce your client to a funder, this is a referral and paragraphs 5.1 to 5.3 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs will apply. You should inform the client of any financial or other interest which you have in making the referral, as well as any fee-sharing arrangement relevant to the client's matter. You may wish to assess whether, by introducing a client to a funder, you are carrying out credit-related regulated financial services activities that fall within the scope of the Financial Services (Conduct of Business) Rules (COB rules). This would involve you carrying out your own assessment on the basis of the specific circumstances of the TPLF agreement.

You must always act with honesty and in the best interests of each client (see SRA Principles 4 and 7). You are also expected to provide information in a way that clients can understand and to make sure that they are in a position to make informed decisions about the services they need, how their matters will be handled, and the options available to them (see paragraph 8.6 of the Code of Conduct for Solicitors, RELs, RFLs and RSLs).

Further help

If you require further assistance, please contact theProfessional Ethics helpline.

We will keep this guidance under review given the evolving external context and our consultation proposal for strengthened regulatory requirements in relation to third party litigation funding.