SRA outlines specific regulation for law firms using litigation funding

The Solicitors Regulation Authority (SRA) has unveiled new proposals to specifically regulate law firms in England and Wales that arrange or utilise third-party litigation funding for consumer claims. These plans, part of a wider initiative to address concerns in the high-volume consumer claims market, mandate firms to notify the SRA of such arrangements, provide clients with a prescribed 'funding information document', and maintain a comprehensive 'third-party litigation funding risk assessment'. The move follows evidence of risks to firm stability and poor consumer outcomes, highlighted by recent firm collapses. The SRA aims to enhance transparency, protect client interests, and ensure firms uphold their professional obligations when engaging with litigation funders.

The landscape of legal services in England and Wales is set for a significant shift as the Solicitors Regulation Authority (SRA) introduces specific regulatory requirements for law firms engaging with third-party litigation funding, particularly in the realm of consumer claims. Unveiled on July 9, 2026, these proposals are a direct response to growing concerns about the stability of firms and the potential for adverse outcomes for consumers in high-volume claims.

This new regulatory framework aims to inject greater transparency and accountability into a sector that has seen rapid growth but also significant challenges. The SRA's initiative underscores a commitment to safeguarding client interests and maintaining the integrity of the legal profession, particularly where external funding arrangements could introduce conflicts or compromise professional duties. For practitioners, understanding and adapting to these forthcoming obligations will be crucial to ensure compliance and mitigate regulatory risks.

Third-party litigation funding, where an external entity finances legal costs in exchange for a share of any proceeds, has become an increasingly prevalent mechanism for pursuing claims, particularly in collective and group actions. While it can enhance access to justice by enabling claims that might otherwise be unaffordable, its unregulated nature has raised concerns. The Legal Services Act 2007 (c. 29) established the SRA as the regulatory body for solicitors in England and Wales, tasked with promoting regulatory objectives including protecting the public interest, improving access to justice, and protecting consumers' interests.

Historically, solicitors have been bound by general professional principles, including acting in clients' best interests and maintaining independence, as outlined in the SRA Code of Conduct. However, the SRA has observed clear evidence that third-party litigation funding, especially in high-volume consumer claims (HVCC), can create risks to firm stability and lead to poor consumer outcomes. High-profile firm failures, such as SSB Law and Pure Legal, which collapsed owing significant sums to litigation funders, have brought these risks into sharp focus, prompting the SRA to describe this area as one of the 'greatest harm and risk'. This regulatory gap has been further highlighted by recommendations from the Civil Justice Council for statutory regulation of litigation funding.

The SRA's proposed regulations introduce five key requirements, some applying to all solicitors arranging third-party funding, and others specifically to firms handling funded consumer claims. For all solicitors, the new standards will be added to the SRA Standards and Regulations, mandating that they must: maintain independence from the funder; act in clients' best interests; only disclose confidential information with informed client consent; and provide written confirmation to clients and funders that the funder is not regulated by the SRA. These fundamental obligations reinforce existing professional duties but provide explicit clarity in the context of external funding.

For firms handling consumer claims, the requirements are more prescriptive. They must provide clients with a 'prominent funding information document' in a prescribed form. This document must clearly explain the funding arrangement, including the availability of free-to-use alternatives such as ombudsman schemes, government redress schemes, or legal expenses insurance, ensuring clients make informed decisions. Furthermore, firms will be required to notify the SRA promptly when they use or arrange third-party litigation funding for consumer claims. This notification mechanism is designed to give the SRA earlier visibility of emerging risks and enable targeted inquiries where concerns arise.

A crucial new obligation is the preparation and maintenance of a 'third-party litigation funding risk assessment'. This assessment must be completed before a firm receives funding or a client enters an agreement, and it needs to be updated every six months, approved by the firm's chief executive/managing partner and compliance officers. The risk assessment should encompass the firm's legal evaluation of the claim, the anticipated defendant strategy, and a costs forecast. Additionally, some firms using litigation funding for consumer claims will be required to maintain a 'plan setting out how the law firm would achieve and resource an orderly closure of its business, if that were necessary', also updated bi-annually and approved by senior management. These measures directly address the financial instability and client detriment observed in previous firm collapses. The SRA also voiced concerns about funders themselves, noting some may lack appropriate expertise, capital, or could be exploited for economic crime, aligning with the Legal Services Board's broader regulatory objectives.

The SRA's proposed regulations mark a significant step towards greater oversight and consumer protection in the burgeoning field of litigation funding for consumer claims. For practising attorneys, these changes necessitate a thorough review of current practices, particularly concerning client communication, due diligence on funding arrangements, and internal risk management. Firms must proactively develop the required 'funding information documents' and 'third-party litigation funding risk assessments', ensuring they are robust and regularly updated. The consultation period, closing on September 17, 2026, presents an opportunity for firms to engage with the SRA and shape the final rules.

Looking ahead, practitioners should anticipate increased scrutiny from the SRA on their funding arrangements and be prepared to demonstrate adherence to the new standards. The emphasis on client best interests, transparency, and firm stability signals a more proactive regulatory approach. While the SRA's proposals address immediate concerns, the broader debate around statutory regulation of litigation funders, as recommended by the Civil Justice Council, continues. Firms should monitor these developments closely, as further changes to the regulatory landscape for litigation funding are likely.