Allens' submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into litigation funding and the regulation of the class action industry

In brief 5 min read

The Federal Parliamentary Inquiry is the third inquiry in four years to consider the state of Australia's class action regime. 

Allens has advocated for reform to the class action regime for many years, including by way of submissions to inquiries conducted by the Australian Law Reform Commission¹ and the Victorian Law Reform Commission.² We have made a detailed submission to the current inquiry in which we outline our concerns regarding the increasingly entrepreneurial direction of Australia's class action landscape and advocate for (and against) various reforms. These include submissions for permanent reform to Australia's continuous disclosure regime and against the removal of the prohibition on contingency fees. We note that yesterday, after intense debate, the Victorian contingency fee bill passed the Legislative Council, meaning contingency fees will soon be allowed in at least one Australian jurisdiction.³

Background

On 13 May 2020, the House of Representatives referred to the Parliamentary Joint Committee on Corporations and Financial Services (the Committee) an inquiry into litigation funding and the regulation of the class action industry (the Inquiry). Attorney-General Christian Porter has stated that the purpose of the Inquiry is to determine whether or not Australians are 'receiving their fair share' from class action settlements and to examine 'the extraordinary profits made by the booming litigation funding industry'.⁴

The terms of reference of the Inquiry include:

• regulation and oversight of the litigation funding industry and litigation funding agreements;
• the application of common fund orders in class action proceedings;
• evidence of the present and future impact of class actions on the Australian economy, particularly in light of the COVID-19 pandemic; and
• the consequences of entry into contingency fee arrangements by Australian lawyers.

As we recently reported, the economic impact of the COVID-19 pandemic has already accelerated long-awaited class actions reform, with changes to the regulation of litigation funding and the continuous disclosure laws announced by the Federal Government without waiting for the outcome of the Inquiry.

In a further development relevant to the Inquiry, on Thursday 18 June, following an intense debate, the Victorian Legislative Council passed (22-16) the Justice Legislation Miscellaneous Amendments Bill 2019 providing for contingency fee arrangements in Victoria. The Opposition's proposal to cap such fees at 35% was defeated. Given the significance of this development, we expect it to be an area of focus in the Inquiry's final report.

Our response to the Inquiry

Allens has analysed class action filings for a number of years. Our annual Class Action Risk Report discusses key observations and trends in the changing class action industry landscape.

We have become increasingly concerned that the original objectives of the class action regime are being undermined for the benefit of entrepreneurial plaintiff lawyers and litigation funders, and to the detriment of group members.

To this end, we welcome the class action reforms announced recently and think they are an important step forward.⁵ However, further reform is required to achieve an appropriate balance in the class action legal landscape.

Our key submissions made to the Inquiry are summarised below.

• Economic impacts of Australia's current class action industry, including during COVID-19: The COVID-19 pandemic has brought into sharp focus the current lack of balance in the class action regime in favour of litigation funders and plaintiff firms, and the impact entrepreneurialism is having on the Australian economy. That impact is most stark in the area of shareholder class actions. Today, Australia is considered one of the most favourable jurisdictions in the world for shareholders - and their lawyers and litigation funders - to pursue listed companies for alleged contraventions of market disclosure obligations. We welcome and support recent measures taken by the Federal Government to address the current lack of balance in the class action regime by temporarily easing the continuous disclosure rules under the Corporations Act 2001 (Cth). However, the measures are temporary and have clear limitations.⁶ We encourage the Federal Government to implement more comprehensive and permanent reform in this area, including the introduction of an appropriate fault-based regime in respect of the continuous disclosure obligations and a due diligence defence for other disclosure standards.
• Regulation of litigation funders: It has been Allens' position for some time that regulation of the litigation funding industry is required. We have become increasingly concerned that the entrepreneurial nature of class actions is leading to instances of conduct that appear to prioritise the interests of lawyers and / or litigation funders over those of group members. We welcome the Federal Government's recent announcement of the regulation of funders. However, to ensure the effectiveness of this reform, we consider that further steps are required to tailor the Australian Financial Services Licence and managed investment scheme regimes to the particular circumstances of litigation funding. We also consider that further reforms are required with respect to court supervision of litigation funders and the supervision and regulation of the relationship between lawyers and litigation funders.
• Common fund orders: We consider that common fund orders and similar arrangements should not form any part of Australia's class action regime. We oppose any legislative intervention that would alter the recent decision of the High Court⁷ that there is no power to make such orders under the current regime. Common fund orders do not increase access to justice or facilitate fair and equitable outcomes for plaintiffs. They have led to an increase in competing class actions. These fundamental problems with common fund orders apply equally at all stages of a class action, including at settlement, and we consider that such orders should not be allowed at any stage.
• Class closure orders: Class closure orders are an essential aspect of the class action regime. Such orders facilitate settlement and allow finality to be achieved for both the group members and the defendant. We consider that the Federal Court Rules 2011 (Cth) should be amended to include an equivalent provision to section 33ZG of the Supreme Court Act 1986 (Vic) which expressly permits the making of a class closure order.
• Contingency fees: We are opposed to lifting the current ban on contingency fees. We consider that contingency fee arrangements are unlikely to improve access to justice or result in greater returns to group members. In our opinion, lifting the prohibition on contingency fees may lead to less financially viable outcomes for plaintiffs in claims that would otherwise have been run on a 'no win, no fee' basis. Such arrangements also risk conflicts of interest and may give rise to an abuse of process on the part of plaintiff firms.

Next steps

The Committee has received over 70 submissions which express a broad range of views in relation to the class action regime, litigation funding, contingency fees and potential areas for reform.

The Committee is due to produce its final report by 7 December 2020. We will continue our engagement with the Inquiry and will continue to report on key developments in this area.