A new report into third-party litigation funding by legal market research agency Jures and commissioned by Fox Williams, has concluded that there are four crucial areas for development if the industry is to survive and prosper.

First, it needs a growing profile within the legal profession. The report identifies that the success or otherwise of third-party funding will depend upon the extent to which it is embraced by the legal profession. Second, it needs a growing profile within the financial community. While there has been plenty of discussion about third-party funding emerging as a new asset class, investors have yet to be convinced that it will provide the desired returns – even in today's depressed markets, in which many of the traditional forms of investment have failed to deliver.

Third, it remains to be seen how the expected regime of voluntary self-regulation will cope with the three factors identified by Lord Justice Jackson in his report on litigation costs as being vital issues for third-party funding. These issues are:

(a) establishing an acceptable voluntary code for third-party funders to deal with such matters as capital adequacy – the need for funders to have sufficient capital in order to meet their obligations if a case is lost, and the circumstances in which funders can withdraw from cases;

(b) revisiting the question as to whether there should be statutory regulation of third-party funders by the Financial Services Authority when the market expands; and

(c) whether the third-party funder should be liable in unsuccessful cases to pay the whole of the winning party's costs (rather than an amount limited to the level of its funding of its own losing party).

Fourth, while third-party funding has mostly been involved with commercial claims to date, its future will be governed in part by the extent to which it is capable of developing a different model with regard to consumer claims. This will be particularly interesting when combined with the alternative business structures which will be permitted from October 2011 by the Legal Services Act.

In order to grow in the short term, third-party funders would be well advised to increase their profiles within the legal and financial communities, and particularly with those law firms with smaller commercial clients for whom lack of available cashflow is likely to prevent them bringing a sizeable, meritorious claim. Larger commercial clients are less likely to turn to third-party funders, despite the attraction of being able to remove the litigation from their balance sheets. Such clients have so far tended to prefer to fund their claim in the normal way, rather than giving up a sizeable proportion of their winnings to an outsider.

In addition, funders could streamline their acceptance procedures, which often take a number of months. The market will also expand if funders adopt a less conservative attitude to investment. Understandably, in the early days it is crucial to prove the financial model to investors and demonstrate the returns that can be made. In time, once the model has been proved, if funders are prepared to relax their acceptance criteria (for example, by funding cases with a 60% chance of success rather than a 75% chance of success), they will be able to expand their portfolios substantially.

One of the biggest threats to third-party funding in the long term might be the advent of contingency fees, whereby the lawyers themselves are able to take a percentage of their clients' winnings, as happens in the US. While contingency fees remain unlawful at the moment, they are not opposed by Lord Justice Jackson, and are likely to become a reality in the UK at some stage within the next decade. Funders will be much better placed to retain a share of the litigation funding market when competing with contingency fees if, by the time they are introduced, the funders have established a much greater presence than they have today.

Gavin Foggo is a partner in the dispute resolution department at Fox Williams.