The Federal Treasurer Josh Frydenberg and Attorney-General Christian Porter have announced that litigation funders will soon be required to hold an Australian Financial Services Licence (AFSL), which will dramatically increase the Australian Securities and Investments Commission’s (ASIC) regulatory oversight of them.
The announcement follows a referral to the Parliamentary Joint Committee on Corporations and Financial Services, for inquiry and report by 7 December 2020, of ” … whether the present level of regulation for applying to Australia’s growing class action industry is impacting fair and equitable outcomes for plaintiffs” (Inquiry).
Subject to minimal regulation, litigation funders’ financial returns have notably increased in recent years, driven by an explosion of class action activity. With that increase has come persistent concerns, including with respect to the rate of return given to plaintiff group members from judgment / settlement outcomes (on average about 50 per cent), and “competing class actions” which are essentially near-identical claims against a defendant. There is also the spectre of secondary market activity, i.e. funders trading their entitlement to judgment outcomes, which is a growing feature of the US market.
AFSL licence holders are subject to obligations set out under the licence instrument itself, and the general obligations under s. 912A of the Corporations Act 2001 (Cth) (Act). For example, 912(1)(a) requires an AFSL holder to “do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly”.
Therefore, foreseeable areas of focus for litigation funders may be the level of disclosure provided to plaintiff group members on the level of financial return that will be taken by the litigation funder. Funding agreements themselves are, quite often, complicated and technical documents. It can be very difficult to penetrate them, in terms of who is getting what in the final accounting.
912(1)(d) of the Act requires AFSL licence holders to ‘have available adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements’. Will this mean capital requirements on litigation funders? It is highly likely, given that this requirement is a recent feature of the Singapore and Hong Kong regulatory regimes for litigation funders (both being global centres for arbitration proceedings, which are commonly funded forms of dispute resolution).
Finally, 912(1)(g) requires AFSL holders to be a member of an external dispute resolution body – the Australian Financial Complaints Authority (AFCA). Will plaintiff group members be able to take litigation funders to AFCA in due course to resolve their grievances? In addition, AFSL holders must report ‘significant breaches’ of their obligations under 912A to ASIC pursuant to s. 912D within 10 business days of becoming aware of the breach. What impact might that action, when it occurs, together with complaints being able to be made to AFCA, have on ongoing class actions?
Taken together, the additional obligations placed on litigation funders, in the context of the arguably opaque environment in which they have hitherto been operating in, and against what will be the backdrop of potentially ongoing class actions (i.e. ASIC may be considering issues whilst the class action is on foot), will make for challenging regulatory territory. Perhaps that is why ASIC has consistently opposed calls for litigation funders to be licensed and under its jurisdiction.
A fascinating, and highly speculative area for thought is this; how will this additional regulation interplay with the oversight exercised by the court in respect of class actions?
For example, imagine a judge approves the wording of an “opt out” notice to plaintiff group members regarding a novel funding mechanism to be used by the litigation funder (assuming the common fund orders come back into being, and most likely in Victoria). In the absence of an amicus curiae, the judge does not have the benefit of anyone challenging the funding mechanism (it is inappropriate for the defendant to do so, as they do not act for the plaintiff group members) and has to work with the evidence put before her / him by the parties. ASIC, with its greater regulatory powers permitting it access to information, and focused on issues of efficiency, honesty and fairness, subsequently considers the notice to be misleading or problematic in some other way. The arguable resulting tension would make for an interesting potential regulatory dilemma…
Another consideration, and potentially implicit in the Federal Treasurer’s statement, is how this development will affect the tenor of class actions litigation. Will litigation funders, who instruct the plaintiff law firm, adopt different tactics? Will their well-resourced opponents? It is far too soon to say, but not too soon to appreciate the potential change.
Change is coming for litigation funders, and for the broader class actions industry. Far from cooling down, the class actions industry is likely to increase in temperature in the coming years – though the heat may be coming from different angles.
Liam Hennessy is Financial Services Director at Gadens Lawyers