Expansion of Class Action Lawsuits is Damaging Trust in UK’s Business and Legal Environment

A new report from leading UK think tank recommends changes to the UK’s corporate law in order to limit the worst excesses of the rapid class action expansion

• The number of class action cases, those in which multiple people seek compensation from a business after having suffered the same or similar harms, have surged;

• Legal reforms in 2015 expanded access to ‘opt-out’ claims in particular. Claimants can apply on behalf of a speculative class of people who may have suffered harm;

• This increase in class action cases has been driven by a growing industry of third-party litigation funding (TPLF), the primary goal of which is to profit from these lucrative lawsuits; 

• UK class actions in 2023 involved claims totalling £123.17 billion, more than twice the UK’s entire Defence budget for that year;

• And in the same year, the total value of opt-out class actions reached £56.32 billion, marking a 48% increase from £38.09 billion in 2022;

• Total class actions have also involved 540 million people since 2015. This a ratio of 8:1 when compared to the size of the British population;

• Contrary to claims from some advocates of TPLF, this funding mechanism does not meaningfully improve access to justice;

• Litigant funders only support 2% to 4% of the cases pitched to them, demonstrating that they are interested in cases with high profit potential, rather than those that are just;

• Litigant funders also stand to make a considerable sum from these cases. For example, funders received 80% of the damages awarded to claimants in the high-profile Mr Bates v The Post Office case;

• An expansion in class action access could also harm business confidence and the broader UK economy as investment is driven abroad to countries with less aggressive legal regimes;

• And there have already been signs that UK firms are spending more of their available capital on legal costs, rather than research and development, job creation or business expansion;

• A new report from the Adam Smith Institute (ASI) advocates that we hold TPLF to the same standard as other investment products, while updating corporate law to give businesses appropriate flexibility in providing compensation without the need for class action litigation.

A new report by the Adam Smith Institute (ASI) outlines how the expansion of class action lawsuits is undermining trust in the UK’s business and legal environment. This increase in class action access and third-party litigation funding has damaged private sector confidence and imposed enormous settlement bills on businesses. At the same time, the greatest beneficiaries of this shift have not been individual claimants, but claimant-focused law firms and litigation funders. 

The number of these types of lawsuits, in which multiple claimants who have suffered the same or similar harms can seek compensation from a business, have significantly increased. While traditionally class actions have required claimants to ‘opt in’ to proceedings, reforms introduced in 2015 have expanded access to ‘opt-out’ claims, in which claimants can apply on behalf of a speculative class of people who may have suffered harms. ‘Opt out’ claims leave businesses exposed to large-scale litigation from large groups of claimants, which are often ill-defined.

The scale of the increase is staggering. 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% 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 2% to 4% 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% 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.

As report author Sam Bidwell also highlights, investor confidence in the UK is already falling, and the uncertainty created for businesses by the expansion of class action cases is a barrier to the recovery of that confidence moving forward. There have been signs that UK firms are spending more of their available capital on legal costs, rather than research and development, job creation or business expansion. And firms which would have otherwise considered investing in the UK may increasingly turn to other countries instead which have less intrusive class action regimes. This would materially damage the UK’s growth prospects. 

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:

“As this report shows, the growing appetite for class action lawsuits in this country is having a dramatic impact on UK plc. We know that more businesses are concerned about rising business litigation, with nearly three quarters reporting an increase in cases brought against their companies over the past five years.

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.

If Britain is to remain truly open for business, it is important to tackle the predatory claims culture which is causing such alarm among businesses.”

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.”

Notes to editors:  

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Sam Bidwell is Director of The Next Generation Centre at the Adam Smith Institute. He holds a BA from the Faculty of Law at the University of Cambridge.

The Adam Smith Institute is one of the world’s leading think tanks. It is ranked first in the world among independent think tanks and as the best domestic and international economic policy think tank in the UK by the University of Pennsylvania. Independent, non-profit and non-partisan, the Institute is at the forefront of making the case for free markets and a free society, through education, research, publishing, and media outreach.