The Government made it clear it doesn’t intend to introduce detailed regulations for third party litigation funding (TPLF) when it excluded litigation funding schemes from the definition of managed investment schemes (MIS) in the Corporations Act 2001, on 12 July.

“I don’t agree with that,” said Freehills class action litigation specialist Jason Betts, who anticipates the Australian market will now widen, particularly as foreign funders see an opportunity to fund class actions and other complex litigation in Australia.

“It’s important that those that enter the funding market have the capital to support their endeavour, because if you wish to take the benefit of a large commission from a successful recovery you should also face the costs if you’re unsuccessful.”

Betts, together with Freehills partners Damian Grave and Ken Adams, co-authored the second edition of Class Actions in Australia, released on 26 July, which explores the “exponential” development of class actions since the first edition was published seven years ago.

With TPLF now a firmly-established and successful industry in Australia, and with a deepening market, new chapters in the book address a lack of licensing requirements and regulation for TPLF.

“There are no prudential requirements that operate on litigation funders, so there’s no minimum capital holding that they must maintain … no minimum requirements as to the amount that can be charged by way of commission by the funder, or the level of control the funder can exercise over the litigation,” said Betts, adding that these issues could be addressed by requiring funders to hold a type of Australian Financial Services Licence (AFSL) like IMF Australia.

“I think it’s appropriate that there be minimum capital requirements, so you’re not in the position where at the end of a case a successful defendant is seeking its costs … and can’t recover them because the funder is either not in the country or doesn’t have sufficient capital.”

John Walker agreed. “There absolutely needs to be licences [under the relevant provisions of the Corporations Act] for all funders. There’s millions of dollars that are being promised … and if you’re not around and you don’t have any assets in the jurisdiction and you’re unwilling to be transparent about what’s going on, it could get messy; the defendants are left with self help that ties up capital,” said Walker.

Walker reiterated IMF’s stated view that “chapter 7 [of the Corporations Act] is the way to go”.

“Hopefully there won’t be a collapse like a HIH [and] over time people will see disclosure, capital adequacy and other consumer protection mechanisms as an appropriate way to go in a maturing market,” he said, crediting the Freehills co-authors on a “thorough” second edition.

“I’ll look at it more as and when issues come up because often Freehills is on the other side so it’s nice to know what they’re thinking,” Walker added.

Question marks remain

Betts said Australia was leading the charge on TPLF in the common law world and it was disappointing that the Federal Government was not offering more detailed consideration.

“I think the reason for that is there’s a political sense that class actions and litigation should be encouraged, rather than regulations introduced that stifle the growth of the industry,” said Betts, adding that his team is seeing a larger volume class action litigation than it did five years ago, as well as more complex and very well-resourced action.

“Gone are the days of the stereotype of the well-funded defendant against the poorly-funded plaintiff … we’re seeing two reasonably well-funded combatants and that’s one definite change.”

This growth means class actions are now a serious boardroom and director liability concern.

“There are many unanswered legal questions about how the courts will apply some of the principles that deal with class actions generally and specifically in the shareholder class action space. There’s a big question mark over what the appropriate test for causation is  and there’s an even bigger [one] as to what the appropriate calculation of loss is, so a company faced with a class action commenced against them is facing significant discovery and large legal bills,” said Betts.