GREEN PAPER: Regulation of Crowdfunded Legal Advice and Litigation
protecting people from the risks associated with crowdfunded legal advice and litigation
Introduction
Crowd funded legal advice and litigation is increasingly in the spotlight thanks to some high-profile cases such as those brought by the Good Law Project and Alison Bailey, or some of the more famous defamation claims/counterclaims we have seen recently.
It goes without saying, that in an adversarial system with increasingly limited legal aid and where costs consequences flow from litigating, crowdfunding for legal advice and litigation could be a force for good. Nothing in this green paper is intended to detract from the good that crowdfunding can do, nor to call into question the conduct or motives of anyone who has currently engaged in crowdfunding.
However, the advent of crowdfunding brings with it the potential for harm:
Donor harm
This harm has the most direct link between the activity and those harmed. There are two main ways in which this could occur:
The donor is misled1 as to the strength of the case, or the outcome of the case, and has provided funds in circumstances where they may otherwise not have done.
The donor is misled as to what the funds are used for.
Some fundraisers use some of the funds for ancillary or incidental expenses and they do not always make this information prominent when soliciting funding donations.
Some fundraisers use surplus funds, obtained either because the funding drive has been more successful or because they have elected not to pursue the particular matter to litigation, to fund other litigation they are involved in or backing.
The first potential mechanism of harm is a feature of all crowdfunded litigation. The second is more likely to occur in political or pressure group litigation.
Taxpayer harm
The potential for this harm is at its highest in political or pressure group litigation because it is most likely to be brought against a public authority. There are examples, such as in some of the Good Law Project litigation, where protective costs orders are issued capping the fundraiser’s liability for costs. The public authority is then unable to recover its full costs even where it is successful. A public authority may have no option but to defend a claim against it because of the potential precedential value. The claimant, however, is not exposed to significant financial risk because the costs of the claim are funded by others and, as such, there is less of a disincentive to bringing speculative, merit-light2, or academic claims.
There is a second order harm to the taxpayer, in that the cost of the court hearing, especially one where a party advances a significant number of arguments in a “kitchen sink” approach to litigation, is not covered by the fees required to be paid by the litigants.
Systemic harm
This harm is more nebulous but potentially includes a range of harms from blocking court time with merit-light and academic claims, and consequently delaying access to justice for others, to undermining trust in the judicial system.
That being said, there are examples where the law acts to protect people even where the harm may be low (on an individual level) and unquantifiable overall.3
The options
Option1: Do nothing
One possible response to the increasing use of crowdfunding of legal advice and litigation is to simply let it run its course and accept that some level of harm is inevitable, and outweighed by the “general good” of enabling cases that would otherwise not be brought to go ahead.
The case for doing nothing
The primary case for doing nothing is that there is no reliable evidence base that the harms set out earlier in this paper are occurring. There is some anecdotal evidence, including discussions between lawyers on Twitter, but as yet no wide-scale evidence of established harm.
The case against doing nothing
Particularly egregious misleading statements may already be offences contrary to the Fraud Act 2006.4 Fraud offences are, however, generally a police matter and police forces are already stretched. It is likely the police would take a similar view of this conduct as they do to other less obviously criminal conduct such as unfair trading practices, advising that it is a "civil matter" and not for them to investigate.
There may also be investigative or evidential difficulties for a police investigation into this conduct.
For example, “misleading” is not a defined term within the Fraud Act 2006 and so there is no further guidance available as to what might be considered to be misleading within this context. Is it misleading to simply not make reference to the prospects of success? Is it misleading not to tell people you already have significant reserves and you just do not want to put your own money at risk?
Some of the misleading conduct may relate to the prospects of success of the particular case. A fundraiser may have misdescribed the advice they have been given and, therefore, ought to know that their request for funding is misleading, but the protection of legal advice from search and seizure powers means the police may not be in a position to properly progress an investigation.
Crowdfunding is, in the absence of any legislative intervention, here to stay and is likely to increase in use. Perhaps the strongest argument against doing nothing is that by failing to grasp the nettle now the eventual fall-out when something goes wrong will be much worse.
Option 2: Encourage voluntary self-regulation
The next possible option is a halfway house between doing nothing and legislative intervention, for example creating a “trust mark”5. It would need to involve encouraging the setting of voluntary standards, communicating them to those involved in crowfunding (donors, fundraisers, platforms) and having some form of outcome for non-compliance.
The case for voluntary self-regulation
To some extent this case builds on the case for doing nothing. Without evidence of wide-scale harm, legislative intervention may seem like using a sledgehammer to crack a nut. If people were able to donate safely, and with confidence, to crowdfunding campaigns which are undertaken in line with a code of conduct they may choose to donate only to those fundraisers. This would drive down harm by influencing donors towards the more “trustworthy” fundraisers.
The case against voluntary self-regulation
The primary case against this option is that it provides incredibly limited protection and could, in some circumstances, actually lower protection. Simply setting voluntary standards without some form of non-compliance outcome may legitimise problematic fundraising.
A voluntary scheme’s main sanction would be loss of use of the relevant trust mark.
This is unlikely to have any material impact on those fundraisers who are not political campaigners or pressure groups because it is unlikely they will be involved in repeat fundraising. It is not obvious, therefore, what incentive there would be for them to comply with a voluntary code of conduct even if they signed up to it.
Loss of use of the trust mark may be an incentive for groups which repeatedly fund raise to comply with the voluntary code of conduct. However, it is not clear they would feel compelled to sign up to the code in the first place. It is likely those funding political or pressure groups do so because they identify with the cause which is being “advanced” through the litigation, and so confirmation bias may lead to them disregarding that the organisation has not chosen to become a member of a self-regulation scheme.
In order to have the best possible chance of mitigating the potential harms in this area, the standard of behaviour expected from fundraisers needs to be the same across the board. This is not achievable through voluntary self-regulation.
Option 3: Legislative intervention - change to the Civil Procedure Rules 1998
This type of reform could involve amending the Civil Procedure Rules 19986 adding permission stages to crowdfunded litigation so that a person would have to convince a Judge they had an arguable case, and that their crowdfunding had been undertaken in a transparent and fair manner, in order to proceed to litigation.
It could also introduce an assessment, at the end of the case, as to whether or not the money has been properly spent and if not could seek recovery of any costs from the individual/campaign group rather than the crowdfunding.
The case for legislative intervention - change to the Civil Procedure Rules 1998
The primary case for this option is that it limits the amount of legislative change and, consequently, parliamentary time. The Civil Procedure Rules 1998 can be amended by statutory instrument7. It provides wider protection than the previous option because it removes the voluntary element - a person bringing or defending a claim before the courts would be required to follow the Civil Procedure Rules 1998.
The case against legislative intervention - change to the Civil Procedure Rules 1998
It is not immediately obvious it would be an appropriate use of the powers in the Civil Procedure Act 1997 to seek to regulate the crowdfunding of legal advice and litigation. The power, effectively, allows rules to be made in order to govern the practice and procedure of actions before the civil courts. It clearly does not go far enough to govern raising funding to obtain advice before issuing proceedings. It is also open to question whether the Civil Procedure Act 1997 contains a power to introduce a permission stage generally into litigation. Judicial reviews currently have a permission stage, but the legislative underpinning for that is to be found in the Senior Courts Act 19818.
Leaving aside whether the vires exists to make the procedural changes, they may not be best placed to tackle the full range of harm. It is likely that in order to detect misleading behaviour an investigation into the fundraising would be needed. This would not sit easily within the court process and could add additional unnecessary delays. Depending on what conduct is considered to be unacceptable, Judges may need to undertake training in investigative practices.
Another point to consider is that this option would not be able to provide a way to minimise the stockpiling of surpluses in circumstances where a possible case is abandoned before the court process begins. Similarly, it could not realistically impose transparency obligations in respect of what proportion of crowdfunding receipts is spent on ancillary or incidental expenses.
Option 4: Legislative intervention - wider regulatory regime
This option involves imposing legislation backed regulatory standards on the crowdfunding of legal advice and litigation. There are two main ways in which it could be delivered: applying an existing body of law, with appropriate modifications; or, enacting a codified body of law to deal specifically with the issues crowdfunding of legal advice and litigation raises.
One existing body of law which might be applied with modification is consumer law - specifically the law relating to fair trading. However, the modification it is likely to require could potentially lead to a significant amount of work and create a regime which is not easy to navigate. Discussion of option 4 will, therefore, be confined to the latter, codification, method of delivery.
The case for legislative intervention - wider regulatory regime
The primary case for legislative intervention is that, because it can be designed to catch all forms and instances of crowdfunding for litigation or legal advice it would not leave the same amount of potential for residual harm. It could impose specific duties relating to honesty and integrity which we can be more certain will catch the type of behaviours which might be causing harms. It could also provide for bespoke outcomes to ensure harms which do occur are properly remedied, including specific criminal offences which are tailored to the unacceptable behaviours.
An advantage of developing a wider regulatory regime is that it can be used to impose specific duties on people to ensure transparency in communications relating to judgments as well as communication of those judgments. This could be done in a way which could be easily updated to deal with emerging concerns the relevant enforcement body has: for example, a power to issue guidance or codes of conduct with force of law could be part of the suite of powers given to a regulator.
That leads to another, connected, benefit of creating a bespoke regime: powers. Crowdfunding of legal advice and litigation introduces a complex balancing of rights and potential harms which, although not unique, are certainly not common. Any regulatory body which was charged with overseeing, and enforcing, a regulated landscape would need the necessary powers to carry out that duty effectively. Those against whom powers may be exercised should be provided with adequate safeguards to protect them against those powers being abused. Achieving that balance could be made more difficult if regulation were imposed by applying an existing body of law with modification.
The case against legislative intervention - wider regulatory regime
The main case against creating a new legislative regime is the lack of established evidence of harm. Introducing regulation would make fundraising more complicated and, in the absence of legal aid, may lead to a barrier to justice for some people. It would also divert parliamentary time and resources when there are a significant number of competing priorities as the country continues to work through the impacts of leaving the European Union and the Covid-19 pandemic.
Additional points to consider
If a regulatory option were to be progressed it would be necessary to consider:
Which body would be best placed to regulate?
Would this be an existing body or a new one?
How would the body be funded?
This could be through general taxation, a “licence fee” on the fundraisers (there may need to be an expressed prohibition on passing this through to donors), or through some form of levy.
What investigatory and enforcement powers would be needed?
Whether there is a need to treat pre-litigation advice and litigation differently?
How can issues pertaining to legal professional privilege could be managed?
What is the minimum standard of behaviour which should be imposed on fundraisers?
Tentative conclusions and next steps
Assuming the harms identified are occurring, the best mitigation of those harms would be to progress option 4. It provides the strongest protection of donors and the system generally whilst providing an opportunity to safeguard the legitimate interests of those who crowdfund for legal advice and litigation.
As I have written this green paper I have formed the tentative conclusion that there is merit in considering how option 4 might be progressed. It is likely, therefore, that a white paper setting out in more detail a potential regulatory landscape will follow.
I would be interested in hearing the views of those of you who have read this green paper, including anything you think I have missed out or where you disagree with the cases for or against. I will take those views into account as I consider whether or not to progress this project to the white paper stage.
Thank you for reading this green paper. If you’ve found it interesting and would like to see where it leads, or you would like to see how I tackle other topics in future please
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Something may be misleading if it is presented, either by act or omission, in a way which causes someone to take a decision they would not otherwise have taken. It does not necessarily mean the fundraiser is being dishonest.
There are possible professional consequences for solicitors who act for clients who issue meritless proceedings. However, findings that political or pressure group judicial reviews are without merit are rare due to the permission stage. Nevertheless, there are arguments that using the court system for political campaigning, or to advance a political cause, is abusive.
See, for example, the Consumer Protection From Unfair Trading Regulations 2008 (S.I. 2008/1277).
See, in particular, section 2 of the Fraud Act 2006. It is worth noting that the fundraiser does not need to receive any money for the gain or loss element of the offence to be complete.
An example of this is the Fundraising Regulator.
See sections 2 and 3 of the Civil Procedure Act 1997.
See section 31 of the Senior Courts Act 1981.