Blog: At a glance: regulation of litigation funding in Switzerland – Lexology

Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

The Swiss Federal Supreme Court held in 2004 that litigation funding by third-party funders is permissible in Switzerland provided that the funder acts independently of the client’s lawyer (BGE 131 I 223). The court even stated that it could be advantageous for a claimant to have his or her claim assessed by an independent expert who intends to cover the financial risk of the envisaged litigation and thus complements the claimant’s lawyer’s view (BGE 131 I 223 consid. 4.6.3).

In 2014, the court expressly confirmed its earlier decision and emphasised that, meanwhile, litigation funding has become common practice in Switzerland. The court further concluded that it is part of the lawyer’s professional duties under the Federal Act on the Freedom of Movement for Lawyers (BGFA) to inform claimants about a potential litigation funding option as the circumstances require (Federal Supreme Court decision 2C_814/2014 consid. 4.3.1).

Thus today, litigation funding is an accepted practice in Switzerland and has been judicially endorsed repeatedly by the Federal Supreme Court in recent years. In light of its rather comprehensive and detailed legal analysis, the court established a quite favourable and predictable environment for third-party litigation funding in Switzerland.

Nevertheless, the Swiss third-party litigation funding market is still relatively small. The reasons for this might be the rather late establishment of litigation funders in Switzerland compared with other jurisdictions, and the fact that class actions and other mechanisms of collective redress do not yet form part of Switzerland’s civil procedural law practice. However, with the envisaged revision of the Swiss Civil Procedure Code (CPC), third-party funding in Switzerland will be further promoted, since the Final Draft of the revised CPC requires the Swiss Federal Council to provide the public with adequate information regarding third-party litigation funding to facilitate access to justice.

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

There is no explicit limit on what is acceptable as compensation for the funder’s services. However, as a general rule stated by the Swiss Penal Code (article 157), a third-party funding agreement – as any other agreement under Swiss law – must not constitute profiteering (namely, exploitation of a person in need).

The Federal Supreme Court did not explicitly state a limit but has indirectly approved the common practice in Switzerland with success fees ranging from 20 to 40 per cent of the net revenue of the proceeds. In its legal analysis, the court cited a source who described a success fee of 50 per cent as ‘offending against good morals and thus illegal’, however, without confirming or even commenting on this opinion (BGE 131 I 223 consid. 4.6.6).

In practice, the funder’s share is commonly dependent on the amount of proceeds recovered by the claimant and on the point in time at which the dispute comes to an end. Typically, the third-party funder’s share is lower, the sooner a case can be settled or resolved. In recent times, the pricing of third-party litigation funders in Switzerland has become increasingly sophisticated so that the pricing structure may vary depending on the specific characteristics of the case. Frequently, a third-party funder’s success fee is calculated on the basis of a time-dependent multiple of the amount invested or committed by the funder, where appropriate combined with a percentage share of the proceeds recovered.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

There are no specific provisions in the CPC or in any other Swiss legislation. However, the Federal Supreme Court held that a range of existing general provisions in various parts of the Swiss legislation (eg, article 27 of the Civil Code, article 19 of the Code of Obligations or article 8 of the Unfair Competition Act) are applicable should a litigation funding agreement violate certain principles of Swiss law (BGE 131 I 223 consid. 4.6.6).

With regard to regulatory provisions, the court explicitly stated that third-party litigation funding cannot be considered an insurance offering as defined by the Swiss Insurance Supervision Act (ISA), since there is no payment of a premium for the coverage of future risk (BGE 131 I 223 consid. 4.7). Further, the core offering of a funder does not, in general, fall under the Swiss financial market laws (eg, the Banking and Insurance Acts, the Anti-Money Laundering Act and the Collective Investment Scheme Act). However, depending on the funding structure, funders might qualify as asset managers of collective investment schemes and must be authorised by the Swiss Financial Market Supervisory Authority (FINMA).

In light of the rules pertaining to lawyers’ professional conduct in Switzerland, which do not allow for lawyers to be paid on the basis of contingency fees only, it has to be kept in mind that any funding agreement that directly or indirectly results in such a contingency fee model for the involved lawyer would violate the respective provisions.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

The lawyer’s professional conduct in Switzerland is governed by article 12 of the BGFA. According to several Federal Supreme Court decisions, the lawyer’s independence in acting on behalf of his or her client is crucial; this also applies to cases involving third-party funding. The Court determined that provided that there is a clear separation of the roles between the lawyer and the funder, a lawyer who advises his or her client in relation to a funder has no conflict of interest in principle. Rather, it is part of the lawyer’s professional duty to support his or her client in negotiations with a third-party litigation funder.

In addition, the Court made clear that the claimant’s obligations under the litigation funding agreement (eg, to fully inform the funder about all the aspects and the developments of the case, not to enter into a settlement agreement without the funder’s prior approval, etc.) do not jeopardise the lawyer’s independence from the funder.

Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

The Federal Supreme Court clarified this question in part when it determined that litigation funding is not deemed to be an insurance offering as defined by the ISA and is thus not regulated by FINMA. As the core offering of a funder generally does not fall under the Swiss financial market laws, there is no known interest of the Swiss financial regulator to oversee litigation funding.

However, the Federal Supreme Court does not seem to exclude a need for future regulation (BGE 131 I 223 consid. 4.6.6).

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