Crackdowns on litigation funders’ unfair takings

Crackdowns on litigation funders’ unfair takings

Adeshola Ore – The Australian – Tuesday 22 December 2020

Ligation funders would be forced to return a minimum of 70 per cent of proceeds from a case to class action participants, under reforms proposed by government MPs.

The Morrison government’s crackdown on litigation funders this year followed a ballooning number of class actions and cries from industry groups that overseas litigation backers were threatening investment and jobs.

A parliamentary joint committee’s report into litigation funding and regulation of class actions was tabled on Monday and made 31 recommendations, including legislative changes to court proceedings aimed at ensuring class action members had access to fair and equitable justice.

The committee said inadequate regulation of the class ­action industry disproportionately favoured lawyers and funders over class action members and stressed there was “virtually unanimous agreement” that greater oversight of the industry was required.

Victorian Liberal senator James Paterson, the committee’s chairman, said the inquiry said the light touch regulatory environment had been exploited.

“Access to justice will remain available to Australians who need it but on reasonable terms that ensure they walk away fairly compensated for their loss, not the victim of more exploitation by those seeking to profit from their misery,” he said.

The committee recommended the federal government investigate the best way to implement a threshold where litigation funders guarantee a minimum return of at least 70 per cent of the gross proceeds to class action members.

It also called for the government to investigate whether a “graduated minimum return” above 70 per cent be established for “shorter, less risky and less complex cases’’. The recommendations would also force litigation funders to compensate the representative plaintiff for adverse costs to ­ensure a “proportionate risk” is undertaken when pursuing class actions.

Under another recommendation, the government would review the feasibility of requiring lawyers working on a contingency fee arrangement to hold an Australian Financial Services Licence and operate as a managed investment scheme. This would apply only in Victoria, which is the only jurisdiction that permits lawyers for representative plaintiffs in a class action to charge for legal costs when fees paid in a successful outcome are calculated as a percentage of the money recovered in the class action. This had the effect of allowing them to operate as a litigation funder and a lawyer simultaneously.

The proposals would extend the same regulation applied to litigation funders to lawyers ­operating on this basis in the state.

But Labor is expected to reject key recommendations in the committee’s report, and will oppose the committee’s support of the recent legislative changes which require litigation funders to obtain an Australian Financial Service License and be regulated as managed investment schemes. Labor will use a response report to argue that subjecting funded class actions to those rules would increase costs for plaintiffs in class actions.

The committee has proposed to make permanent changes to the continuous disclosure laws that the Treasurer legislated using temporary COVID-19 emergency powers.

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