On Wednesday (29 February), ASIC extended interim class order relief granted to funders and lawyers involved in class actions that exempt them from certain requirements of the Corporations Act.
These exemptions mean that funders are not required to hold an Australian Financial Services (AFS) Licence, which also includes associated responsibilities to manage conflicts of interest and prepare a product disclosure statement.
“What we say is that you should be licensed, and all of the requirements of the Corporations Act, in relation to licensing, including conflicts of interests, will therefore apply to all funders,” said IMF Australia managing director Hugh McLernon when speaking to Lawyers Weekly.
IMF is comfortably the largest litigation funder in Australia. In the 2010-11 financial year, it increased its total revenue by 88 per cent to over $40 million. It has been licensed since 2005 and questions why any law firms or funders would not want to be covered by the excluded provisions of the Corporations Act.
“Despite calls to the contrary, it is neither expensive nor time consuming to be licensed,” said Vernon. “The argument put by the major law firms, Slater & Gordon and Maurice Blackburn, is that licensing was anti-competitive as it would stop people coming into the industry.
“That is nonsense. The two things that will stop you are a lack of money and not being able to find suitable professional people who want to make the switch from being litigators to debt collectors.”
The litigation funding business model was turned upside down by the judgment in October 2009 by a full-bench of the Federal Court in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd.
The Court held that private entities involved in litigation were participating in an unregistered managed investment scheme and were therefore in breach of the Corporations Act.
This ruling meant that litigation funders would be required to hold Australian Financial Services Licenses, threatening the conduct of current and future class actions.
Chris Bowen, the minister for Corporate Law at the time, came to the rescue of the funders and plaintiffs involved in large scale litigation by removing class actions and proof of debt arrangements from the definition of a managed investment scheme in the Act.
The latest extension of the interim class orders relief to funders is expected to apply until 30 September this year.
McLernon believes that by allowing unlicensed funders to continue to operate, the litigation funding industry will continue to be plagued by a perception that it is not properly regulated.
“Because they are willing to exempt funders, you are accepting that we need to be licensed, otherwise you wouldn’t need an exemption,” he said. “In the interim, you are dealing with complaints about unregulated activity.”