AFSL requirement short-lived for class action funders

Expect swift action from early October 3 min read

The Federal Government is unwinding the class action funding regulations introduced by the previous government in July 2020, including the requirement for funders to maintain an Australian Financial Services Licence (AFSL).

The proposed changes follow the Full Federal Court's decision in LCM Funding Pty Ltd v Stanwell Corporation Ltd¹, which held that class action funding arrangements are not 'managed investment schemes' (MISs) for the purposes of the Corporations Act 2001 (Cth). Read more on that decision here.

The Government has released an exposure draft of regulations that will:

• exempt class action funding schemes from the MIS scheme (largely redundant in light of the LCM Funding case);
• exempt funders from the requirement to hold an AFSL; and
• exempt class action funding schemes from the product disclosure regime under Part 7.9 and anti-hawking provisions under Part 7.8 of the Corporations Act.

The removal of the AFSL requirement means unlicensed funders with untested financial backing and credentials may re-enter the Australian market. It also means funders will no longer be required to adhere to the general AFSL obligations, including to do all things necessary to ensure their services are provided efficiently, honestly and fairly, and to maintain certain standards.

The Department of Treasury is accepting submissions on the draft regulations until 30 September 2022, following which we expect the Government will act quickly to implement them.

The changes

The draft regulations effectively reverse the amendments made by the previous government under the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth).

This means that:

• it will be beyond doubt that class action funding arrangements are not subject to the MIS regime; and
• class action funders will no longer need to hold an AFSL. However, funders will need to maintain certain bespoke conflict of interest practices, as they did prior to July 2020.

The changes will apply to class action funding arrangements entered into after the regulations commence, as well as to arrangements already on foot, but only in relation to the duration of the scheme that occurs on or after that commencement.²

Where to from here?

While the Government's reversal of these regulations comes as no surprise, its appetite for broader class action reform remains unclear.

The Government has announced it is considering recommendations by the Australian Law Reform Commission (ALRC) to clarify and strengthen the powers of the Federal Court to ensure fair and reasonable returns to class action members. However, it is not clear whether the Government intends to revisit all 24 recommendations made by the ALRC, including the six recommendations specifically directed at increasing regulation of litigation funders.

Those recommendations included that:

• solicitors should be prevented from seeking to recover unpaid legal fees from plaintiffs or group members in funded class actions;
• there should be a statutory presumption that funders will provide security for costs;
• the court should be empowered to award costs against funders and insurers who fail to comply with the overarching purposes of the Federal Court Act 1976 (Cth);
• the court should be given greater supervisory powers over funding agreements to ensure they are only enforceable with the court's approval and for the court to be able to reject, vary or amend their terms;
• ASIC should amend Regulatory Guide 248 to require funders to report annually to ASIC on compliance obligations and conflicts of interest; and
• the Corporations Regulations 2001 (Cth) should be amended to include 'law firm financing' and 'portfolio funding' within the definition of 'litigation funding scheme', to ensure emerging funding models are brought within the regulations.

If you would like to discuss the implications of these proposed reforms, please contact Belinda Thompson.