The increase in class action access and third-party litigation funding has damaged private sector confidence and imposed enormous settlement bills on businesses, it argues. At the same time, the greatest beneficiaries of this shift have not been individual claimants, but claimant-focused law firms and litigation funders. 

The scale of the increase is “staggering”, ASI said. By 2023, class actions accounted for claims totalling £123.17 billion – more than double the UK’s defence budget for that year. By the same year, the number of individuals involved in these cases reached an unprecedented 540 million since 2015, an increase of over 170 per cent over the 2022 200 million figure.

This has been driven by a growing industry of third party litigation funding (TPLF), the primary goal of which is to profit from these lawsuits. Although some have argued that TPLF widens access to justice, litigation funders typically back just two per cent to four per cent of the thousands of proposed cases, often focusing on cases that offer the most profit rather than the most merit. 

And the greatest financial beneficiary of a successful claim tends to be the litigation funders. For example, litigation funders received 80 per cent of the damages awarded to claimants in the high-profile Mr Bates v The Post Office case. In turn, this risks undermining trust in the UK’s legal system more broadly, as cases are seen to be litigated on the basis of profit, rather than in the interests of claimants.

To restore business confidence in the UK’s legal and business environment, the ASI recommends the following measures:

• Consistent regulation of TPLF, holding it to the same rules and standards as other investments;
• Increase transparency in TPLF-backed class actions, with a blanket requirement to disclose third-party funding;
• Apply anti-money laundering regulations consistently, ensuring TPLF isn’t used as a loophole for financial fraud;
• Ensure competition law protects businesses from class actions while regulatory investigations are ongoing;
• Allow businesses the chance to offer their own compensation packages without the immediate threat of judicial interference.
• These reforms would create a fairer class action system that protects aggrieved claimants, while preserving the foundations of the UK’s legal system and British businesses.

Seema Kennedy OBE, executive director of Fair Civil Justice, said: “Money that would otherwise be spent on R&D, opening new factories or creating new jobs and apprenticeships is being spent by British businesses defending themselves in endless litigation. It is a drag on growth and only benefits lawyers and those funders that are bankrolling the claims.”

Sam Bidwell, director of the Next Generation Centre at the Adam Smith Institute and report author, said: “The UK stands to suffer enormous reputational and material damage from an ever-expanding class action regime. Its rapid expansion over the past decade is only damaging our ability to attract investment from big, mobile international companies - without meaningfully expanding access to justice for ordinary people. This is the worst of both worlds.

“At a time when the UK’s appeal as an investment destination is in question for many businesses, we need to be doing everything that we can to remain competitive, whilst making sure that the legal system still leaves appropriate space for meritorious claims.

“The system is in dire need of reform. We must regulate TPLF on the same footing as other investments, and ensure greater transparency across the system. Furthermore, we must reform our corporate law to ensure that it is fit for purpose, giving businesses greater responsibility for providing compensation if they fall foul of regulatory requirements.”

Neil Purslow, chairman of the Executive Committee of the International Legal Finance Association, said, however, that responsible businesses “should have no cause for concern from litigation funding”.

He added: “The sector plays a small, but important role in providing access to justice while contributing to the UK’s leading legal sector. The cases funders back have several common features: corporate wrongdoing, a clear and compelling case to answer and claimants who could not otherwise afford their day in court.

“As this report recognises, funders take on just a fraction of cases after careful consideration of the risk and significant due diligence. So it’s contradictory and disingenuous in the extreme to simultaneously argue funders take on too few cases while also causing a proliferation in litigation.”

Read the report here.