After the European Parliament’s call for better regulation of third-party litigation funding in 2022 in EU Member States, various initiatives have been launched. One of these initiatives is the European Commission’s mapping study to gather information from market participants to obtain a better understanding of the market and current practices. Deminor welcomes the Commission’s efforts to obtain more insight in litigation funding and therefore contributed to this study by submitting responses to a variety of questions in June 2024.
The European Commission is currently conducting a mapping study to gather critical information on the state of third-party litigation funding (“TPLF”) across EU Member States. This initiative seeks to provide a clearer understanding of market dynamics, national regulations, and prevalent practices in the field of litigation funding. As part of a broader effort to promote transparency and consistency within the EU's legal frameworks, the study is an important precursor to any potential future legislative action.
The motivation behind this study stems from the European Parliament’s call for better regulation of TPLF in 2022.[1] According to the European Commission's legislative timetable, the aim is to first conduct thorough research on existing practices before proposing any detailed regulatory measures. This will include collecting data from Member States, commissioning external studies, and organizing consultations with key stakeholders. The intention is to ensure that any forthcoming legislation is based on a well-founded understanding of the market and its impact on various parties involved.
The Commission has sought input on various aspects of TPLF, including the current state of regulation, market behaviours, and how potential conflicts of interest are managed. These results of the study may be critical for shaping the future regulatory environment and ensuring that both funders and claimants operate within clear and fair guidelines.
The questions posed by the Commission aim to gather detailed insights into the operation, practices, and regulatory environment of third-party litigation funding in the EU. They cover inter alia the types of cases being funded and areas of law they are subject to, such as commercial law, consumer protection, and arbitration, and the average number of cases funders are involved in annually. They also explore questions regarding the use of portfolio litigation funding, the minimum and typical claim values, and the funding arrangements between funders and claimants, including the ratio of investment to claim value. The study furtherer investigates common practices regarding funders' remuneration, including the typical share of compensation awarded to funders and the contractual conditions in litigation funding agreements.
Other questions seek to understand how funders handle potential conflicts of interest, the level of control funders exert over legal proceedings, and the extent to which funding agreements are disclosed to courts or parties involved. The Commission also asks about existing national legislation on TPLF, its effectiveness, and the need for further regulation at the national or EU level. It also explores the impact of TPLF on access to justice and potential economic consequences, such as the cost of litigation or legal insurance.
Deminor, a prominent player in the litigation funding space, has actively contributed to this debate by submitting its responses to the Commission. During this process, Deminor openly communicated a number of relevant aspects, such as the types of cases it funds, the typical claim values and investment amounts, operational criteria including target returns, and questions of control and influence. Deminor has always emphasized that in the context of collective securities litigation, its clients – who are typically professional institutional investors – are capable of negotiating and securing transparent and equitable funding agreements. These agreements ensure fair and market-aligned compensation for Deminor while addressing potential conflicts of interest in a manner that protects the interests of all parties involved.
Deminor’s stance highlights the importance of maintaining a balanced approach to regulation – one that preserves the flexibility needed for sophisticated institutional investors while ensuring fairness and transparency for all parties engaged in litigation funding agreements.
As the EU Commission continues its efforts, it will be crucial to monitor developments closely. The results of the mapping study and subsequent stakeholder input will likely shape the direction of any future regulatory framework in this rapidly evolving market.
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[1] The study follows a resolution by the European Parliament adopted on 13 September 2023 based on the so called “Voss report”. The Voss report is a report with recommendations to the Commission on responsible private funding of litigation. It was adopted by Committee on Legal Affairs on 25 July 2022 (procedure: 2020/2130(INL)). The resolution by the European Parliament included recommendations to the Commission on responsible private funding of litigation. It was based on Article 225 of the Treaty on the Functioning of the European Union (TFEU), which allows Parliament to request the Commission to submit a legislative proposal, and if it does not submit one, to inform the Parliament of the reasons.
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