By Nieva Connell, Partner 

The federal Attorney-General announced in March 2020 that he would set up a new parliamentary committee to examine the “extraordinary profits being made by the booming litigation funding industry”, with a view to establishing whether or not class action participants “are receiving their fair share” from class action settlements. The A-G said “To quote judges who’ve presided over cases involving litigation funders, the profits they make have been variously described as ‘stratospheric’, ‘arguably excessive’ and ‘not fair and reasonable’”.

On 13 May 2020, the proposed inquiry was referred to the parliamentary Joint Committee on Corporations and Financial Services, for inquiry and report by 7 December 2020. While the title of the inquiry and the comments by the A-G relate to litigation funding, as will be discussed below, there is some hidden detail in the referral made by the A-G to the joint committee had has received almost no attention.

In what may not be coincidental timing, the federal Treasurer announced after the A-G’s announcement that he would introduce Regulations which will make litigation funders subject to oversight.

With the Joint Committee inquiry and the proposed new Regulations, it is fair to say, the continued role of litigation funders in class actions in Australia is squarely under scrutiny (and the litigation funders are (perhaps understandably) not happy).

Joint Committee Inquiry into “Litigation funding and the regulation of the class action industry”

There have already been three inquiries into litigation funding in the last 6 years – none of which resulted in any substantive change to the way that litigation funding operates in class actions in Australia.

The recent past-inquiries include the Australian Law Reform Commission (ALRC) report into “Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders” which the A-G tabled in Parliament only last year.

So, what’s different this time?

There is a definite rhetoric from the government that litigation funding does not benefit anyone but the litigation funders – both the A-G and the Treasurer commented on the apparent link between litigation funding and the steep rise in class actions in recent years, and on the percentage of class actions settlements that is funnelled to the litigation funders. Neither has acknowledged the explanation by the litigation funders that the fact that the number of class actions has increased is evidence of a healthy increase in access to justice which is delivered by litigation funders with justice being delivered to more Australians. Neither of those factors are new.

The Terms of Reference of the Inquiry make it clear that the Joint Committee will be collecting data on the quantum of litigation funding fees compared with the amounts that end up in the hands of class members, the costs and commissions earned by litigation funders and the “treatment of that income”; the latter presumably being an indication that the Federal Government is concerned that much of the fees that litigation funders earn in the robust Australian class action environment end up in the hands of overseas entities.

It is unclear how, or if, the A-G believes that the data collected on the “litigation fees versus damages paid to class members” will differ from the data recently collected by the ALRC on the same topic. That data is relatively recent and shows that class members can expect to receive as little as 55% of the settlement sum (with the remainder going to litigation funders and lawyers).

The current Inquiry will, however, review matters not previously referred to the ALRC including:

1. what evidence is becoming available with respect to the present and potential future impact of class actions on the Australian economy;
2. the potential impact of Australia’s current class action industry on vulnerable Australian business already suffering the impacts of the COVID-19 pandemic;
3. the effect of unilateral legislative and regulatory changes to class action procedure and litigation funding;
4. the consequences of allowing Australian lawyers to enter into contingency fee agreements or a court to make a costs order based on the percentage of any judgment or settlement;

It is apparent from the first two topics in the list above that the Inquiry will have a strong economic focus – focusing not on issues relating to litigation funding at all, but rather on issues as to whether the Australian economy can afford to have a “robust” class action system as a whole (whether with or without the operation of litigation funders). This goes to a much more fundamental question about the utility of a class action system in Australia – a topic upon which the recommendations of the Joint Committee are unlikely to result in a ground-breaking shift.

It is apparent from the final two matters in the list above, that the Federal Government is not enamoured with the decision of the Victorian government to effectively go it alone and introduce a Bill allowing contingency fees for class actions in Victoria.

As reported on in our April and May editions of Insurance in MOtion, Victoria has taken a different approach to litigation funding – by proposing legislation that effectively makes it undesirable for plaintiff law firms to engage litigation funders; by permitting those law firms to charge a contingency fee (in a similar way to a litigation funder) thus making it less likely that the law firms will use litigation funding. Whether that proposed legislation will have the ultimate effect that the class members end up with a greater percentage of the settlement sum in their own hands will not be apparent until the proposed legislation is in practice. However, we can expect that the Joint Committee will issue a view on whether it is counter to the interests of the Federal class action system to have a State class action system operating on a different basis to the Federal system.

Submissions to the Joint Committee are due by 11 June 2020. We will keep you updated about the work of the Joint Committee.

Proposed Regulations Making Litigation Funders Subject to Prudential Oversight

Presently, litigation funders are not subject to prudential supervision or licensing requirements. The changes proposed by the Treasurer, which could commence operation in 3 months without the need to pass any amending legislation, will change that.

The changes will require the litigation funders to hold an Australian Financial Services Licence and comply with the managed investment scheme regime, removing current exemptions. Under the proposed Regulations, litigation funders will have to be licensed by ASIC and meet requirements to act fairly, maintain an appropriate level of competence and ensure they have adequate resources.

Litigation funders have complained of the cost of compliance with the proposed Regulations – said to be in the vicinity of $10,000 – $15,000 per year. It is unlikely that the (relatively modest) costs of compliance will deter the government from implementing the proposed Regulations.

Litigation funders are unlikely to challenge the Government’s ability to make the Regulations (rather than amend the Corporations Act, which would require an Act of Parliament), given they have a potentially more serious problem in the pending Joint Committee Inquiry, and there is little justification put forward by litigation funders as to why they should not be subject to prudential supervision.

Conclusion

There are two current moves by the Federal Government to review and change the way that litigation funders operate in Australia.

The recently announced Parliamentary inquiry into “Litigation funding and the regulation of the class action industry” and the even more recently announced proposed Regulations making litigation funders subject to regulatory oversight has got some asking:

Do the new moves spell the end of litigation funding in Australia? The answer is almost certainly no. However, litigation funders (and perhaps the Victorian government) may be feeling the blow torch when the Joint Committee inquiry reports back to Parliament on 7 December 2020.