Trea­surer acts to curb class ac­tion prof­i­teers


Lit­i­ga­tion fun­ders will be forced to op­er­ate un­der tough new rules, as the Mor­ri­son gov­ern­ment or­ders a crack­down to pro­tect Aus­tralian busi­nesses and jobs dur­ing the COVID-19 eco­nomic cri­sis and com­bat a 325 per cent ex­plo­sion in class ac­tion cases.

Re­spond­ing to pleas from in­dus­try groups to shield lo­cal com­pa­nies, Josh Fry­den­berg will an­nounce on Fri­day reg­u­la­tions re­quir­ing lit­i­ga­tion fun­ders to hold an Aus­tralian fi­nan­cial ser­vices li­cence and com­ply with the man­aged in­vest­ment scheme regime.

The Trea­surer said the num­ber of class ac­tions had “tripled over re­cent years” and it was time that lit­i­ga­tion fund­ing ac­tiv­i­ties were “reg­u­lated in a man­ner con­sis­tent with other fi­nan­cial ser­vices and prod­ucts that seek to pro­vide in­vest­ment re­turns to con­sumers”.

“Now more than ever we want Aus­tralian busi­nesses stay­ing in busi­ness and fo­cused on keep­ing peo­ple in jobs rather than fend­ing off class ac­tions funded by un­reg­u­lated and un­ac­count­able par­ties,” Mr Fry­den­berg said.

“There is no rea­son­able ba­sis for lit­i­ga­tion fun­ders to con­tinue to be ex­empt from the same reg­u­la­tion that ap­plies to the en­ti­ties they seek to lit­i­gate against.”

The gov­ern­ment is also back­ing a par­lia­men­tary joint com­mit­tee on cor­po­ra­tions and fi­nan­cial ser­vices in­quiry into lit­i­ga­tion and the reg­u­la­tion of the class ac­tion in­dus­try, which is due to re­port by December 7.

The Aus­tralian re­vealed last year that an ex­plo­sion in class ac­tion claims funded by over­seas lit­i­ga­tion back­ers was threat­en­ing in­vest­ment and jobs in Aus­tralia, with more than $10bn in claims lodged against busi­nesses in 2018-19.

At­tor­ney-Gen­eral Chris­tian Porter flagged class ac­tion re­form ear­lier this month, in­clud­ing heav­ily scru­ti­n­is­ing the bloated prof­its of the ma­jor lit­i­ga­tion fun­ders.

Mr Porter said there was a “grow­ing con­cern that the lack of reg­u­la­tion gov­ern­ing the boom­ing lit­i­ga­tion fund­ing in­dus­try is lead­ing to poor jus­tice out­comes for those who join class ac­tions

ex­pect­ing to get fair com­pen­sa­tion for an in­jury or loss”.

Un­der pre­vi­ous rules, lit­i­ga­tion fun­ders did not face the same reg­u­la­tory scru­tiny and ac­count­abil­ity as other fi­nan­cial ser­vices and prod­ucts and were ex­empt from hold­ing an AFS li­cence, avoid­ing reg­u­la­tory scru­tiny un­der the Cor­po­ra­tions Act.

Mr Fry­den­berg said the re­moval of pre­vi­ous ex­emp­tions would force lit­i­ga­tion fun­ders to se­cure a li­cence from the Aus­tralian Se­cu­ri­ties & In­vest­ments Com­mis­sion. AFSL hold­ers are ob­li­gated to “act hon­estly, ef­fi­ciently and fairly, main­tain an ap­pro­pri­ate level of com­pe­tence to pro­vide fi­nan­cial ser­vices, and have ad­e­quate or­gan­i­sa­tional re­sources to pro­vide the fi­nan­cial ser­vices cov­ered by the li­cence”.

The gov­ern­ment’s amend­ments to ex­ist­ing reg­u­la­tions will take ef­fect from Au­gust.

The lit­i­ga­tion in­dus­try, which is dom­i­nated by Omni Bridge­way and Lit­i­ga­tion Cap­i­tal Man­age­ment, has grown at a rate of 23 per cent per year since 2014, with in­dus­try rev­enue hit­ting $140.2m last year, se­cur­ing an av­er­age profit mar­gin of 34.2 per cent.

Fed­eral Court data shows class ac­tion fil­ings have in­creased by 325 per cent in the past decade, with lit­i­ga­tion fun­ders tak­ing a sig­nif­i­cant pro­por­tion of pro­ceeds.

Re­search by the Aus­tralian Law Re­form Com­mis­sion has re­vealed lit­i­ga­tion pro­ceeds were di­vided, with 27.8 per cent go­ing to lit­i­ga­tion fun­ders, 55.6 per cent to af­fected share­hold­ers and 16.6 per cent to­wards le­gal costs. When a fun­der was not in­volved, plain­tiffs re­ceived 85 per cent of pro­ceeds.

In 2018, funded class ac­tion pro­ceed­ings filed in the Fed­eral Court con­sti­tuted 78 per cent of all filed class ac­tions, up from 49 per cent be­tween 2013 and 2016. Be­tween 2017 and 2018, 77 per cent of fi­nalised class ac­tions re­ceived lit­i­ga­tion fund­ing, up from 40 per cent be­tween 2008 and 2012.

The ALRC said there were 54 class ac­tions launched in 2018-19, up from 18 in 2012-13 and 37 in 2015-16.

Aus­tralian In­dus­try Group chief ex­ec­u­tive Innes Wil­lox has led the busi­ness cam­paign to crack down on global lit­i­ga­tion firms, which he said had been earn­ing “out­ra­geous” re­turns in Aus­tralia at the ex­pense of lo­cal com­pa­nies, claimants and gov­ern­ments.

The AiGroup re­leased a sev­en­point plan last year call­ing on the gov­ern­ment to reg­u­late lit­i­ga­tion fun­ders through ASIC, im­pose rea­son­able lim­its on re­turns to plain­tiff lawyers and lit­i­ga­tion fun­ders, and pro­hibit lit­i­ga­tion fun­ders from ex­ert­ing any con­trol over the po­si­tions and ar­gu­ments pros­e­cuted by law firms.

Lead­ing in­sur­ance bro­kers told The Aus­tralian there was a greater risk to smaller com­pa­nies than larger busi­nesses, which could self-in­sure and had big­ger bud­gets for risk-man­age­ment staff and in­ter­nal com­pli­ance.

How The Aus­tralian broke the story on May 7

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