“So tired of the straight line
And everywhere you turn
There’s vultures and thieves at your back
The storm keeps on twisting
Keep on building the lies
That you make up for all that you lack”
— Sarah McLachlan, “Angel”
Litigation funding and Licensing
Imagine this, a fund that returns 390% and is not required to hold an Australian Financial Services Licence (AFSL).
Welcome to the world of litigation funding.
What is litigation funding?
For those unfamiliar with litigation funding, the concept is simple. A person (the funder) provides funds or indemnities, or both, under a funding agreement (including an agreement under which no fee is payable to the funder or lawyer if the scheme is not successful in seeking remedies) to enable the general members of the scheme to seek remedies.
READ RG248
The Attorney General has suggested that, in 2013, Labor turbo charged this industry when it exempted litigation funders from licensing requirements and prudential supervision.
In the seven years since that decision was made, the number of class actions filed in Australia has tripled, with the majority of class actions bankrolled by litigation funders.
The industry’s revenues topped $140 million last year, with an average profit margin of nearly 35%.
Major players Omni Bridgeway and Litigation Capital Management control nearly 35% cent of the market, with another 31 firms making up the rest of the industry.
But what’s wrong with helping the ‘little people’ hold the big end of town to account?
Why does an area, so focused on enforcing the consumer protection obligations, need to be further regulated and made subject to the same consumer protection provisions?
Conflicts of interests and duties
Where litigation funding is concerned, the tension arises between access to justice and the interests of the funders, the liquidators, lawyers and participating members, and how the spoils of victory get allocated.
The Australian Law Reform Commission found that when litigation funders were involved in a class action, the median return to plaintiffs was just 51%, compared to 85% when a litigation funder was not involved.
Two particular and contrasting cases in point:
In the recent NAB consumer credit insurance class action, which was not funded by a litigation funder, Slater and Gordon settled a class action against NAB and MLC on behalf of customers who were mis-sold consumer credit insurance for their card and/or personal loan. 93% of the settlement funds are currently being distributed to eligible group members.
In contrast, Maurice Blackburn represented shareholders against QBE for breaching their continuous disclosure obligations; engaging in misleading and deceptive conduct and making false or misleading statements. 23.2% ($30.75 million) was paid to International Litigations Funding Partners Pte Ltd.
More regulation is always the best solution
If all goes according to plan, we’ll soon see litigation funders brought under the auspices of the Corporations Act and welcomed into the AFSL ( Managed Investment Schemes) regime.
The reform, although unnecessary, is probably less problematic than the proposed timetable.
It’s anticipated that Litigation Funders will transition into the AFS licensing regime in August this year.
This is despite the fact that Attorney General Christian Porters’ Parliamentary Joint Committee on Corporations and Financial Services enquiry is currently consulting with the industry on this proposal. An August 2020 commencement date seems premature given the Committee’s final report scheduled isn’t scheduled to be published until December 2020.
The Government’s unseemly haste is troubling given that this particular parliamentary enquiry seems to be an addition to a previous enquiry conducted in December 2017.
It’s at this point we’d remind you about “The Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders” (ALRC Report 134, 2018) report published in December 2018.
You might recall that the 339-page report discussed the idea of licensing but cited court oversight and self-regulation as adequate.
The ALRC argued that, prior to litigation commencing, the courts already require litigation funding agreements to be submitted and scrutinised, together with solicitors cost agreements. Given that the Courts are capable of managing the activities of the parties, amendments were recommended as an alternative to the imposition of the AFS licensing regime on legal services. Self-regulation, and in particular the role of the Association of Litigation Funders of Australia (ALFA), was discussed as control for member conduct, but achieved the same recognition, and allowed the same influence, given to the advice associations.
WDAT? (What does ASIC think?)
Despite a popular view that ASIC are the “overreaching arm of the Nanny-state”, in reality, ASIC seem less enthused about licensing Litigation Funders than the Government might like. In fact, ASIC have previously argued that funding deals are not financial products and the courts should police claims about their conduct.
In 2013 (hot on the heels of Labor’s exemption), ASIC implemented Regulatory Guide RG 248.
This Guide specifically excludes litigation schemes from the requirements that would otherwise apply under Chapter 7 of the Corporations Act 2001.
Instead RG248 focuses on the need to adequately manage conflicts of interest for the duration of the scheme and the need for appropriate practices to manage any conflicts of interest that may arise. Helpfully, they also identify the most problematic conflicts including where
- lawyers act for both the funder and the members;
- there is a pre-existing legal or commercial relationship between the funder, lawyers and/or members; and
- the funder has control of, or has the ability to control, the conduct of proceedings.
READ RG248
For those of us in the financial services industry, conflicts of interests and duties is well-trodden, and highly regulated, ground.
As professionals, haven’t lawyers already nailed conflicts?
Introducing Big Litigation
Have you considered how many litigation funding companies are owned by law firms? Have you noticed how many litigation funders advertise and promote the fact they are owned by a law firm?
ASIC understand that lawyers are already subject to professional duties and ethical obligations when dealing conflicts of interest.
For example, lawyers are subject to fiduciary duties to their clients, ethical duties to the court, statutory duties under state or territory legal profession Acts, and professional codes of conduct and practice rules.
But, if they are, why is regulation necessary?
And if they aren’t, is the problem big enough to require the nuclear compliance option of AFS Licensing?
The reality is that litigation funding is neither a cottage industry nor the work of a benevolent society.
It’s (increasingly) Big Business.
What’s it all about, Alfie?
With a track record of only 51% of the spoils going to plaintiffs, AFS licensing may provide consumers with the protection and regulatory oversight they so desperately require.
Maybe, but there may be more pertinent issues.
Perhaps the underlying issue driving these reforms is not the fairness of the benefits consumers receive but rather the unpleasant reality, for large institutions, that too much money being extracted from corporate Australia and its insurers.
For example, a settlement of $95 million dollars was secured by Slater & Gordon from Spotless Group Holdings. This action, funded by three litigation funders and brought by a group of aggrieved shareholders, secured benefits no single complainant would have either been able to pursue or achieve. If this case is anything to go by, then IDR and EDR are much better options for larger institutions than consumer access to litigation funding.
This may be the reason that Shadow Attorney-General. Mark Dreyfus, described the current inquiry as “a shameless attempt to protect the government’s big business mates”
What’s next?
If the government is successful in getting the exemptions removed in August 2020, litigation funders will be required to obtain an AFSL from the Australian Securities and Investments Commission. And they too will be required to
- act honestly, efficiently and fairly;
- maintain an appropriate level of competence to provide financial services; and
- have adequate organisational resources to provide the financial services covered by the licence.
They’ll also be subject to the same restrictions and regulatory oversight those of us working within a licensing regime enjoy.
Personally, we can’t wait.
