Referral
1.1
On Wednesday 27 October 2021, the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021 (the bill) was introduced in the House of Representatives and read a first time.
1.2
On Thursday 28 October 2021, the House of Representatives referred the bill to the Parliamentary Joint Committee on Corporations and Financial Services (the committee) for inquiry and report by 19 November 2021.
The problem
1.3
The bill addresses the issue that third-party litigation funders often claim a disproportionate share of a successful action relative to their costs and risks. Such excessive profits may be made at the expense of class action members and can encourage claims to be pursued on a speculative basis. The proposed reforms seek to ensure the distribution of claims proceeds is fair and reasonable between members of the scheme and non-members, as determined by a court.
1.4
Introducing the bill, the Assistant Treasurer, The Hon Michael Sukkar MP, indicated that the bill was intended to ensure that ordinary Australians who seek justice through the class action system receive a fair and reasonable portion of the proceeds of successful class actions supported by a litigation funder. The Hon Mr Sukkar MP indicated the Government was concerned about returns being made by litigation funders at the expense of class members. In many cases litigation funders appear to be making windfall profits that are disproportionate to the costs incurred and the risks undertaken.
1.5
The Hon Mr Sukkar MP identified five objectives of the bill:
requiring claimants to agree in writing to be members of a scheme and to be bound by the scheme's constitution;
clarifying court powers to approve or vary funding distribution methods and introducing a rebuttable presumption about the distribution of claim proceeds to cover costs;
requiring consideration of fee assessor and contradictor advice on legal costs and funder commissions;
regulating the availability of common fund orders to mitigate litigation funders using such orders to expand their commissions; and
seeking to implement a consistent approach to class actions across all jurisdictions.
Background
1.6
Class actions enable a representative plaintiff to bring a claim on behalf of a larger group or ‘class’. These claims are often complex and costly. A representative plaintiff may not have the financial resources to fund the action and may be exposed to liability in the event of an adverse finding. Third-party litigation funding schemes can enable an action by paying the costs of litigation and indemnifying the plaintiff in exchange for a share of any proceeds if the litigation is successful. Litigation funding can therefore play an important role in promoting access to justice by enabling class actions and reducing the risks plaintiffs face from unsuccessful litigation.
1.7
Australia operates an open class action model, whereby potential claimants are bound by the judgement of the court unless they opt-out of the action. Affected individuals may therefore benefit from a successful action (or avoid costs from an unsuccessful action) even though they did not sign up to a scheme or contribute to the costs of running that action.
1.8
Under an open class action model, individuals who did not opt to join an action—and therefore also did not incur the risks or costs of the representative plaintiff—may still receive a share of any settlement in a successful action. This is the ‘free rider’ problem.
1.9
Courts have used common fund orders (CFOs) to address the free-rider problem and limit windfall profits to funders. CFOs have often been made pre-trial and require all class members to contribute an equal proportion of their share of a settlement to the litigation funder—whether or not they signed-on to the action or not. CFOs encourage open class actions and promote certainty and finality for defendants. However the legislative basis for CFOs remains unclear, leading to uncertainty, procedural contests, delays, and increased costs. CFOs may also promote speculative actions that are backed by funders without adequate investigation, and may run counter to common law doctrine with regard to informed consent.
1.10
Courts have also used funding equalisation orders (FEOs) to address the free-rider problem and the issue of disproportionate returns to funders. FEOs require non-scheme members to contribute to the costs of an action borne by scheme members out of any settlement funds. Such orders are designed to ensure all group members contribute equally to the costs of running a class action from which they benefit.
1.11
In contrast to many CFOs, FEOs are made at the conclusion of a proceeding, meaning they account for the actual costs incurred during an action rather than the expected costs. As FEOs are limited by the number of class members who entered into a funding agreement with the litigation funder, returns to litigation funders are generally lower than with CFOs. Unlike CFOs (in which commissions are determined by the court), a court may not vary a litigation funder’s commission rates in an FEO.
1.12
Two recent inquiries into the regulation of class action and litigation funding schemes looked into these issues (among others) and informed this bill:
Inquiry by the Australian Law Reform Commission
1.13
In December 2017, the Government commissioned the Australian Law Reform Commission (ALRC) to conduct an inquiry into class actions and litigation funding to consider, inter alia, the fairness and efficacy of Australia’s class action and third-party litigation funding regimes. The inquiry looked at:
the costs of class action proceedings;
the distribution of proceeds from a class action; and
the adequacy of regulations to address the structure, operation, and terms under which third-party funding entities operate.
1.14
On 24 January 2019, the ALRC’s report was tabled in Parliament. The report included 24 recommendations to federal, state and territory governments, the Federal Court of Australia, and the legal profession. These included the following:
the court appoint a referee to assess the reasonableness of legal costs (recommendation 5); and
the court approve (and may reject, vary, or amend) the terms of third-party litigation funding agreements (recommendation 14).
Regulatory changes on litigation funding
1.15
On 22 May 2020, the Government announced the Corporations Amendment (Litigation Funding) Regulations 2020, to bring litigation funders under regulatory oversight to take effect from 22 August 2020. The amendment requires operators of litigation funding schemes to hold an Australian Financial Services Licence (AFSL) and register as a Managed Investment Scheme (MIS), subject to certain exemptions.
Inquiry by the Parliamentary Joint Committee
1.16
In May 2020, the Attorney-General, the Hon Christian Porter MP, referred an inquiry to the Parliamentary Joint Committee on Corporations and Financial Services (the committee) into regulations applying to the class action industry and their impact on fair and equitable outcomes for plaintiffs.
1.17
The Explanatory Memorandum (EM) for the bill stated that the 2020 inquiry referral was made ‘to enable the ALRC’s recommendations to be tested and refined, while providing an additional evidence base for legislative changes’.
1.18
The committee determined that by minimising the risk of an adverse finding to plaintiffs, litigation funders are vital to facilitating access to justice for individuals. The final report nevertheless raised concerns over the regulatory arrangements and disproportionate share of proceeds obtained by litigation funders at the expense of class members. The Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) argued:
Participants in class actions are the biggest losers in this deal. When they finally get their day in court, it is the genuinely wronged class action members who are getting the raw deal of significantly diminished compensation for their loss, as bigger and bigger cuts are awarded to generously paid lawyers and funders.
1.19
The committee’s report was tabled in Parliament on 21 December 2020. It included 31 recommendations to the Australian Government, the Federal Court, and legal associations. As set out in the EM, the bill responds to 7 of the committee’s recommendation, summarised below:
the Government legislate to provide clarity around CFOs (recommendation 7);
the Federal Court be empowered to approve, vary, reject, or amend litigation funding agreements in the interests of justice in a class action (recommendations 11 and 12);
the court appoint a referee to assess the funding arrangements, the costs of which should be borne by the funder (recommendations 13 and 16);
a presumption that the court should appoint a contradictor in complex funding situations or situations in which a significant conflict of interest is likely to arise (recommendation 18); and
the Government consult on a proposed statutory minimum return to class action members, including consideration of a 70 per cent return of gross proceeds or a graduated approach based on risk, complexity, length of the action, and other factors (recommendation 20).
Government response
1.20
The Government responded to both the ALRC and PJCCFS reports on 20 October 2021.
1.21
The Government response pointed to evidence provided in both reports related to the fees received by litigation funders, noting:
Far too often litigation funders are making profits that are disproportionate, when regard is had to the costs and risk they have undertaken. These undue profits come at the expense of class members whose legal rights a class action is meant to vindicate.
1.22
The report laid out the Government’s concerns with CFOs, arguing a funder’s terms should not apply to class members who have not agreed to become members of a scheme. The report noted alternative mechanisms available to courts to address the free-ride problem and ensure the costs of an action are shared among beneficiaries (the committee assumes the report had FEOs in mind). These mechanisms, the Government suggested, may also promote book building (that is, the process of identifying, contacting, and signing up as many class action members as possible) and greater due diligence on the part of funders.
Purpose of the bill
1.23
According to the EM, the bill amends Chapter 5C of the Corporations Act 2001 to ensure class members are better protected and to ensure returns to litigation funders out of claim proceeds are ‘fair and reasonable’. The bill partially implements the Government Response to the ALRC and PJCCFS reports.
1.24
To improve outcomes for litigation funding participants, the amendments in the bill establish a new kind of MIS, a class action litigation funding scheme, and introduce additional requirements for the constitutions of managed investment schemes that are class action litigation funding schemes. The measure ensures returns to litigation funders out of the claim proceeds of a scheme are fair and reasonable.
1.25
The primary elements of the bill outlined in the EM aim to achieve a flexible, fit-for purpose approach to regulating windfall returns to class action litigation funders through:
(a)
recognising the need for courts to approve and amend agreements related to the distribution of returns from a class action;
(b)
ensuring fair and reasonable returns to class members; and
(c)
minimising interference in private contractual relationships between funders and plaintiffs.
1.26
In particular, the bill is designed to complement FEOs by providing the court with the power to reject, vary, or amend funding agreements. Through this bill, courts would be required to assess the fairness and reasonableness of a proposed distribution of the proceeds of a successful action. The express purpose of these measures is to reduce free-riding and restrain windfall funder profits, whilst encouraging book building and greater due-diligence on the part of funders.
Summary of the new laws
1.27
The bill contains one schedule.
Schedule 1-Litigation funders
1.28
Schedule 1 to the bill amends the Act to provide for a new class of MIS; a class action litigation funding scheme, as defined in Section 9AAA. The bill would define members of an MIS as only persons holding an interest in the scheme who have agreed in writing to be a member and be bound by the terms of the scheme. The EM notes a key intention of the bill is to ensure ‘only those plaintiffs who have consented to become members of the class action litigation funding scheme are liable to contribute to the litigation funder’s fee or commission’.
1.29
Amendments to section 601GA of the Act specify how a scheme is to be constituted, including a requirement that funders cover the costs of representative plaintiffs and court-appointed contradictors.
1.30
The bill requires also that the court approve the distribution of claim proceeds to ensure the agreement is ‘fair and reasonable’. The court may vary funding agreements in the interests of scheme members, having regard for expected claim proceeds, the complexity and duration of proceedings, reasonable legal and other costs, the return on investment for the funder, and risks incurred by the funder, among other factors. An agreement is presumed by the court to be unfair if more than 30 per cent of claim proceeds are to be paid to entities that are not members of the scheme. This presumption may be challenged and is referred to in the subsequent chapter as the ‘rebuttable presumption’. The court’s approval or variation of a funding agreement will generally be informed by a court-appointed contradictor. A list of factors the court must only consider when determining the fairness and reasonableness of a funding agreement is prescribed in section 601LG(3).
1.31
The bill also addresses some jurisdictional issues.
1.32
The EM outlined the anticipated impacts on litigation funders as follows:
greater barriers to charging unfair and disproportionate fees and commissions;
increased incentives to undertake greater book building to enrol class members in an action;
greater certainty and clarity with respect to the court’s powers to intervene in funding agreements;
greater uncertainty about the enforceability of some litigation funding agreements over the short-term;
a reduced funding appetite for certain types of cases; and
increased administrative and compliance costs.
Compatibility with human rights
1.33
The EM argued the bill does not raise any human rights concerns. The EM acknowledged an argument could be made that the court-based mechanism for regulating the distribution of proceeds from a claim may discourage litigation funding firms from backing some cases, thereby reducing access to justice for potential claimants. The EM countered, ‘there is nothing in this bill that prevents any claims from being brought before a Court.’
1.34
The EM further concluded:
The requirement that such a distribution be fair and reasonable promotes the right to have access to justice because it ensures that the portion of a claimant’s remedy to a non-claimant is only done on a fair and reasonable basis. The amendments provide protection against windfall profits and disproportionate returns at the expense of claimants.
Legislative scrutiny
1.35
The Parliamentary Joint Committee on Human Rights reported that the bill did not raise any human rights concerns.
1.36
The Senate Standing Committee for the Scrutiny of Bills had not reported on the bill at the time this report was tabled.
Financial implications
1.37
The average annual regulatory costs on business of the bill is estimated at between $68,000 to $95,000.
Previous inquiries
1.38
In 2017 the Australian Law Reform Commission held an inquiry into the fairness and efficacy of Australia’s class action and third-party litigation funding regimes.
1.39
In 2020 the committee held an inquiry into Litigation funding and the regulation of the class action industry (see above).
Conduct of the inquiry
1.40
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 5 November 2020.
1.41
The committee accepted and published 24 submissions which are listed in Appendix 1. The committee also received additional information, including answers to questions taken on notice. These are also listed in Appendix 1.
1.42
The committee held one public hearing on 12 November 2021 at Parliament House, Canberra, with all witnesses appearing by video conference. The names of witnesses who appeared at the hearing are listed in Appendix 2.
Acknowledgements
1.43
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.
1.44
The committee also thanks the witnesses and submitters who participated in the committee’s previous inquiry into Litigation funding and the regulation of the class action industry.
References to Hansard
1.45
In this report, references to Committee Hansard are proof transcripts. Page numbers may vary between proof and official transcripts.