Post-election class action reform: easing the pressure on litigation funders

Key issues likely to feature on Labor's class action reform agenda 5 min read

Several recently enacted and proposed reforms to the class action regime hang in the balance following the change of government in the 2022 Federal Election. The incoming Labor government is poised to shift gears and adopt a renewed class action reform agenda, which will see an easing of the sustained pressure which the former government placed on litigation funders over recent years.

Key takeaways 

There are at least four issues likely to feature on the class action reform agenda of a Labor government:

• Managed investment scheme (MIS) reforms: the incoming Labor government is likely to wind back the application of the MIS provisions of the Corporations Act 2001 (Cth) (Act) to litigation funding schemes. If implemented, this reform will remove some of the red tape and regulatory issues that funders must navigate prior to the commencement of proceedings, reducing barriers to entry and 'lag time' between the announcement and commencement of class actions.
• Minimum returns reform: the former government's proposal to introduce a rebuttable presumption that group members receive no less than 70% of claim proceeds in funded class actions is likely to be consigned to the dust bin. Abandoning this proposed reform will assuage class action promoters' concerns that further pressure will be placed on funding commissions and ensure that the court's supervisory discretion to approve funding commissions is unaltered.
• Australian Law Reform Commission (ALRC) recommendations: we expect the incoming Labor government to revisit the 24 recommendations made by the ALRC in its December 2018 report on class actions and litigation funding and take steps to enact several changes to the current regime. If the ALRC's recommendation to permit contingency fee arrangements in class actions commenced in the federal jurisdiction is among these changes, it may generate competition between the Supreme Court of Victoria and the Federal Court of Australia as the preferred forums for plaintiff lawyers to commence group proceedings.
• Continuous disclosure reform: following the previous government's introduction of a fault element in the continuous disclosure regime, the new Labor government may undertake a comprehensive review of these changes and their effects.

Key issues

MIS reforms

In August 2020, the former coalition government passed the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (CALF Regulations), which required litigation funding schemes entered into after 22 August 2021 to comply with the MIS provisions of the Act. Amongst other matters, this meant that litigation funders were required to hold an Australian Financial Services License, register the litigation funding scheme, nominate a responsible entity of the scheme and distribute a product disclosure statement to group members.

The CALF Regulations were criticised by Labor prior to and following their introduction. In the Parliamentary Joint Committee on Corporations and Financial Services' report on litigation funding and the regulation of class actions (PJC Report), the dissenting Labor members recommended that 'the government urgently repeal the measures introduced by the [CALF Regulations]'.¹

Accordingly, the incoming government is likely to exempt litigation funding schemes from complying with the MIS regime, which had been the position prior to the introduction of the CALF Regulations. These changes will be welcomed by litigation funders who have criticised the CALF Regulations as unworkable,² and sought to overturn the effect of the regulations in an application which is yet to be determined by the Full Court of the Federal Court.³

Minimum returns reform

On 30 September 2021, the former government released an exposure draft of the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders (Litigation Funders Bill) which,⁴ among other reforms, sought to introduce a rebuttable presumption that group members in funded class actions receive no less than 70% of any claim proceeds. The introduction of this statutory minimum return would vary the existing funding approval process, in which the court exercises its discretion to approve or reject funding commissions sought by litigation funders. In the Explanatory Memorandum to the Bill, the former government explained that the statutory minimum was proposed in response to a concern that 'the proportion of proceeds obtained by litigation funders is often disproportionate'.⁵

The Litigation Funders Bill was introduced into Parliament on 27 October 2021 but failed to pass the Senate before the 2022 Federal Election. The Bill was opposed by Labor, and described by Labor Senator Deborah O'Neill as 'a terrible piece of legislation'.⁶ The 70% statutory minimum was also criticised in a number of submissions during the consultation period for the Litigation Funders Bill, with the Law Council of Australia noting that the minimum 'may in fact be prejudicial to corporate defendants, company directors and their insurers'.⁷

Given Labor's opposition towards the Litigation Funders Bill, and the criticism surrounding the 70% statutory minimum return, it is very unlikely that the Bill will be pursued. The dumping of this proposed reform will allay concerns from class action advocates regarding the efficacy of the statutory minimum returns and preserve the court's supervisory discretion to approve funding commissions.

ALRC recommendations

In December 2018, the ALRC published its report titled 'Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders' (ALRC Report).⁸ We expect that the Labor government will revisit these recommendations as the basis for future reforms of the class actions regime. Our analysis of the ALRC report at the time of publication is available here.

The ALRC Report contained a variety of recommendations regarding the operation of the class action regime which, if implemented, may quell lingering doubts relating to a number of ongoing uncertainties impacting class action practice, including the court's power to make common fund orders at settlement.

However, the Labor government's approach to the ALRC recommendations may lead to the adoption of some significant changes to the class actions regime, including lifting the prohibition on plaintiff law firms from entering into contingency fee arrangements in class action proceedings commenced in the Federal Court. Labor's possible endorsement of the ALRC's recommendation that contingency fees be permitted in Federal Court class actions would represent a significant development in class actions policy, given the previous government's criticisms of this proposal.⁹ If adopted, this reform will also engender competition between the Supreme Court of Victoria and the Federal Court for filings of class actions filings in which plaintiff lawyers seek a contingency fee structure.

Continuous disclosure reforms

Following the outbreak of COVID-19 pandemic, the former government temporarily modified the continuous disclosure regime so that a listed entity would only be liable for failing to disclose information not generally available where it knew, or was reckless or negligent as to whether, the information was price-sensitive. This temporary introduction of a fault element to the Act was subsequently made permanent, and extended to the misleading or deceptive conduct provisions in the ASIC Act 2001 (Cth). Our analysis of these reforms is available here.

While these reforms do not appear to have dulled shareholder class action activity, the incoming government is required to identify and consider any adverse effects caused by the introduction of these amendments.¹⁰ It is possible that the Labor government will take this opportunity to conduct a comprehensive review of Australia's continuous disclosure regime, and misleading or deceptive conduct provisions, as foreshadowed in its dissent to the PJC Report.¹¹