Class actions threaten Britain’s economic growth

The UK’s class action regime is currently facing scrutiny due to its potential impact on economic growth and consumer welfare. According to a report released today by the Institute of Economic Affairs, this system is at risk of imposing significant costs—up to £18 billion—on the economy while benefiting funders and lawyers over consumers. The report, titled Class Act: The case for reforming Britain’s class action regime and authored by competition lawyer Stephen Dnes, highlights that there are approximately ten class action claims pending for every person in the UK, with a staggering total valuation of around £134 billion.

While advocates argue that class actions can provide essential access to justice, the reality is that many cases offer little compensation to those they are intended to help. A striking example cited in the report is the case of Merricks v Mastercard, where a funder sought to distribute just 48p to each claimant, while planning to allocate a substantial £179 million to funders and lawyers out of a £200 million settlement. This disparity raises questions about the alignment of incentives between claimants, law firms, and funders under the current opt-out system, which was introduced in 2015.

The proliferation of class action lawsuits has led to an alarming rise in speculative claims, many of which are weak and unnecessary. Reports indicate that there has been an 'exodus of key lawyers' from the law firm Pogust Goodhead due to conflicts with third-party funders involved in significant cases such as the Fundao dam disaster. These perverse incentives not only slow down the justice process but also divert crucial resources from innovation to legal expenses. Recent analyses suggest that the total economic cost of this litigation trend might encompass £11 billion in lost market capitalisation for innovative firms, hindering their ability to invest in development and growth.

In response to these challenges, the Government is currently soliciting feedback for potential reforms to the class action system. The report lays out several key proposals to ensure that the regime is focused on strong, economically justified cases, including:

• Seed payouts to claimants prior to certification to filter out weak cases
• A competitive market for claims to encourage better payouts from funders
• Rigorous economic assessments at certification to ensure cases demonstrate genuine market harm
• Consolidation of losses to avoid superfluous supply chain disputes
• A hands-off approach to funder returns to eliminate incentives for unnecessary delays

These proposed changes aim to significantly diminish speculative litigation while making class actions a more effective tool for deterring anti-competitive behaviour. Dnes commented on the pressing need for reform, stating “Class actions can play a vital role in deterring anti-competitive behaviour and protecting consumers, but the UK’s regime has gone off course. There is a real risk of friendly fire especially when innovative companies are sued. It is time for a course correction.” He further emphasised that fixing the misaligned incentives in the current system could restore focus on genuine harm, expedite justice, and support sustained economic growth.