The government announced that it will require litigation funder operating in Australia to hold an Australian Financial Services Licence (AFSL) and to conduct class actions as a managed investment scheme.

The Association of Litigation Funders of Australia (ALFA) said they were surprised by this action particularly in light of the final recommendations of the Australian Law Reform Commission (ALRC), and the views of the Australian Securities and Investments Commission (ASIC).

These recommendations had revealed that the courts are best placed to regulate funders and to oversee and manage specific claims and the costs of those claims.

“These important issues should be properly ventilated and debated by all stakeholders and not dictated by the power being brought to bear on politicians by entities representing the interests of corporate Australia and the insurance industry,” chairman of ALFA John Walker said.

The coming move would expose litigation funders to greater scrutiny from the corporate regulator and require them to become licensed financial services providers within three months, ending years of exemptions from the rules.

The licensing move will ensure if there is enough capital for a funder to fulfil its promises to pay the other side if a claim falls over. 

It will cost $10,000 to $15,000 a year to fill out the paperwork and maintain a bigger back office. 

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Furthermore, for some of the overseas funders that might have some tax implications.

David Taylor, partner at Minter Ellison said that the federal Treasurer’s announcement on changes to litigation funders is still not completely clear.

As a result, there will be uncertainty as to what this means for funded class actions that have already been commenced. 

“For example, will they be exempt from needing an AFSL or will the action have to ‘go on hold’ (i.e. be stayed) until the funder has secured a licence?” Mr Taylor said.

“If the actions are not exempt, we could see a significant number of actions with claims for many millions of dollars grind to a halt.” 

This move comes after the Attorney-General had pushed ahead with another class action inquiry on the Australia’s litigation funding industry.

Funders had hit back, with Mr Walker telling Lawyers Weekly that the Attorney-General’s call for another inquiry into class actions follows three independent inquiries over the last six years into litigation funding and class actions that seemingly haven’t delivered the answers wanted by the federal Coalition government and its supporters.

Woodsford Litigation CEO, Steven Friel told Lawyers Weekly that “time and time again, the attacks against litigation funding fall short, and there is widespread recognition of the vital access to justice benefits that we provide.” 

Meanwhile, defendant firms have welcomed the parliamentary inquiry whilst plaintiff firms slammed the move calling it “pointless” and “partisan”.