Final report from the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into litigation funding and the regulation of the class action industry

In brief 9 min read

The Parliamentary Joint Committee on Corporations and Financial Services (the Committee) has completed its inquiry into litigation funding and the regulation of the class action industry and released its much-anticipated final report earlier this week.

The report recommends sweeping reforms to the regulation of litigation funders and plaintiff firms and to the class actions regime more broadly. These recommendations seek to better reflect the original objectives of the class actions regime in order to restore access to justice, promote the interests of group members and deter opportunistic entrepreneurialism in the class actions space.

How does it affect you?

• The Committee's recommendations, if implemented by the Federal Government, will significantly increase regulatory and judicial oversight of litigation funders and plaintiff firms, including with respect to funding commissions and agreements and disclosure of potential conflicts of interest. The Committee found that group members have generally received reduced compensation, compared to 'generously paid' plaintiff lawyers and litigation funders.
• The Committee is critical of the limited regulation of litigation funding in Australia. Its recommendations seek to restore the balance between group members and litigation funders. While there were differing views presented to the Inquiry as to the preferable level of regulatory oversight, there was broad agreement that the current regulatory arrangements are 'too light touch'.
• Class action defendants will no doubt welcome many of the recommended reforms, including the changes to the continuous disclosure regime announced earlier this year being made permanent, continuing and increased regulation of litigation funders, and the limiting of class actions for alleged breaches of corporations law to the Federal Court so as to avoid additional challenges arising from competing shareholder claims being filed in different jurisdictions.

Introduction

The Inquiry received 101 submissions and conducted a series of public hearings involving representatives from industry, law firms and academia. Allens made a detailed submission to the Inquiry, which is summarised here. Our summary of the key themes arising from the public submissions and regulatory developments since the Inquiry commenced is available here.

Allens has been consistently advocating for change to the class actions regime for many years and has previously made submissions to class action inquiries conducted by the Australian Law Reform Commission and the Victorian Law Reform Commission. Allens has also 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.

The Committee considered that the concerns raised about the current state of Australia's class action regime in the submissions and public hearings were well-founded.

Key recommendations

Litigation funders

In July 2020, the Federal Government introduced regulations requiring litigation funders operating in Australia to hold an Australian Financial Services Licence (AFSL) and comply with the Managed Investment Scheme (MIS) regime under the Corporations Act 2001 (Cth) (Corporations Act). You can read more about these changes here. While the Committee endorsed these changes, it recommended that there be a legislated fit-for-purpose MIS regime tailored for litigation funders, which is consistent with our submission.

However, the Committee pointed out that other critical matters remain unaddressed, including the appropriateness of the fees charged by litigation funders and whether the interests of group members are being served by the current regulatory environment.

It has been Allens' position for some time that regulation of the litigation funding industry is required due to increasing concerns that the entrepreneurial nature of class actions is leading to conduct that appears to prioritise the interests of lawyers and/or litigation funders over group members.

We therefore welcome the following recommendations from the Committee:

• that there be increased Federal Court guidance and increased disclosure obligations on funders and plaintiff law firms regarding conflicts of interest. As the holders of AFSLs, funders would also need to have arrangements to manage conflicts of interest and – if the responsible entity of a registered MIS – to place the interests of group members above their own in the instance of a conflict;
• that a litigation funding agreement be approved by the court for it to be enforceable;
• that the Federal Court be afforded the power to power to reject, vary or amend the terms of any litigation funding agreement where the interests of justice require; and
• that there be more frequent use of assessors and contradictors with respect to funding commissions and plaintiff lawyers' fees, which is likely to create further safeguards to protect the interests of group members and ensure the charging of proportionate commissions and fees.

Lifting of the ban on contingency fees

We submitted that lifting the ban on contingency fees would be a significant and unwelcome development for the profession, the class actions regime and the legal system as a whole.

During the course of the Inquiry, Victoria became the first and only jurisdiction in Australia to permit lawyers for the representative plaintiff in a class action to charge for legal costs on a 'contingency fee' basis. We reported on that development here.

The Committee recommended a 'measured and steady' approach to the use of contingency fees in class actions, noting it was not persuaded that the ability of lawyers to bill plaintiffs and group members on a contingency fee basis would lead to reasonable, proportionate and fair outcomes.

Ultimately, the Committee did not recommend the wholesale prohibition of contingency fee arrangements. Rather, it recommended that the Federal Court be conferred with exclusive jurisdiction for all class action claims arising under the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth). If this recommendation is implemented, class action plaintiffs seeking to bring proceedings under that legislation (which are primarily shareholder class actions) could only file in the Federal Court, where contingency fee arrangements are not available.

Further, the Committee recommended that the Federal Government investigate the feasibility of applying financial services regulation (to which litigation funders are now subject) to lawyers operating on a contingency fee basis. The Committee observed that, since a law firm billing on a contingency fee basis is offering both a legal service and a funding service, they ought to comply with the regulatory obligations imposed by the AFSL and MIS regimes.

Common fund orders

We submitted that common fund orders (which require all group members to contribute equally to the costs of the proceeding, regardless of whether they have signed a funding agreement) and similar arrangements should not form any part of Australia's class action regime, and oppose any legislative intervention that would alter the recent decision of the High Court in Brewster¹ that there is no power to make such orders under s33ZF of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) and s183 of the Civil Procedure Act 2005 (NSW).

In Brewster, the High Court held that courts did not have the power to make common fund orders at an early stage of a class action proceeding. However, there has been some discussion about whether the decision precludes a common fund order being made at the settlement or judgment stage.

The Committee acknowledged that common fund orders have both positive and adverse impacts on the operation of the class action regime and litigation funding industry. It noted that the uncertainty in recent years concerning the availability of common fund orders may have led to increased costs.

Ultimately, however, the Committee did not recommend the prohibition of common fund orders, but recommended that the Federal Government legislate to address uncertainty in relation to the availability and application of such orders. The Committee indicated it would be supportive of common fund orders being made at settlement or following judgment.

Class closure orders

We have previously submitted that class closure orders are an important aspect of the class action regime because they facilitate settlement and allow finality to be achieved for both the group members and the defendant. Class closure orders are critical to facilitating settlement negotiations as they assist both sides to understand the total quantum of group members’ claims and enable the settlement amount to be capped by reference to the number of group members.

We welcome the Committee's recommendation, which mirrors the suggestion made in our submission, that the Federal Court Act be amended to provide the Federal Court with an express power to make class closure orders, which the Committee proposes to be modelled on s33ZG of the Supreme Court Act 1986 (Vic) (which expressly permits the making of an order requiring group members to take a positive step, such as responding to a class closure notice, before receiving any benefit from a judgment or settlement).

Continuous disclosure regime

We have long supported a review of Australia's continuous disclosure regime and the private rights of action arising from a possible breach. The temporary changes to continuous disclosure laws implemented as part of the Corporations (Coronavirus Economic Response) Determination (No. 2) 2020 are a welcome step in the right direction. You can read more about these changes here. 

We welcome, as a starting point, the Committee's recommendation that these temporary changes be made permanent. We feel that these changes will benefit shareholders and improve the efficacy of the class action regime, as well as discourage the bringing of speculative claims.

However, we would support the Government implementing more wide-ranging and comprehensive reform in this area, including with respect to the fault elements (which still include negligence in addition to knowledge and recklessness), exposure to criminal liability, and exposure to civil liability for misleading or deceptive conduct.

National consistency for all class action regimes in Australia

The Committee recognised the importance of achieving jurisdictional consistency where appropriate, including in order to reduce 'forum shopping'. It recommended that the federal, state and territory governments work towards achieving consistency in their class action regimes.

Other recommendations

Other recommendations of interest include that:

• the Federal Government investigate legislative change to promote procedural proportionality in class actions, to facilitate the pursuit of class actions where the potential costs and drawbacks are balanced against the potential benefits for the parties and group members, as well as the impacts on court resources, regulatory outcomes and the public interest (however, the Committee declined to recommend the implementation of a certification process for class actions);
• the Federal Court Act be amended to provide the court with express power to resolve competing and multiple class actions;
• the Government consult on the best way to guarantee a statutory minimum return to group members, including whether a minimum gross return of 70% or a graduated approach is appropriate;
• an application for approval of a class action settlement be accompanied by disclosure of certain information to be published following the approval judgment, including the estimated value of group members' claims, the settlement sum, amounts of funding commissions and legal costs and the average payments to different group members; and
• solicitors, law firms and barristers be prohibited from having a financial or other interest (including as a result of ongoing and/or reciprocal commercial arrangements) in a third-party litigation funder that is funding matters in which the solicitor, law firm or barrister is acting.

What's next?

Overall, the Committee's recommendations bring a much-needed dose of clarity and an appetite for a rebalancing of the relationship between different participants in Australia's class actions regime, with greater certainty for class action defendants a likely outcome in the event that the recommendations are received positively by the Federal Government.

We will continue to monitor both the Government's and the Opposition's response to the report and any consequent legislative and policy developments in the class actions space over the coming months.