(By Darrell Choong and Venn King)
The Federal Government has announced that the Corporations Act will apply to litigation funders, bringing the regulation and licensing of litigation funders under the remit of the Australian Securities & Investment Commission (ASIC).
This move reflects the Government’s desire to increase the barriers to entry in the class action industry, and heighten the level of regulatory scrutiny in an otherwise unregulated industry. According to the Treasurer, Josh Frydenberg, the move has been sparked by the rapid growth of the class action industry, with the proposed regulatory changes being necessary to ensure greater transparency and accountability for litigation funding companies.
What are the changes?
The obligations on litigation funders, at this stage, appear likely to be fairly onerous. Litigation funders will be required to hold an Australian Financial Services Licence (AFSL) (although it may be possible for them to ‘rent’ another party’s licence – we will need to see the details of the proposed regulations to be sure) and comply with the managed investment scheme rules in the Corporations Act. Litigation funders will also be under obligations to act honestly and fairly, to be sufficiently competent at providing financial services, and to have adequate resources to complete their work. Whether the changes will dampen the rapidly expanding industry is uncertain, but taken together, the obligations seem designed to be a significant barrier to entry and to dissuade all but the most determined of applicants. But of course, there is sufficient profit in this game to encourage litigation funders to do whatever they need to do to operate their businesses in the regulated financial services environment.
Interestingly, ASIC has previously opposed moves to licence litigation funders. In 2018, ASIC argued against the Australian Law Reform Commission’s (ALRC) recommendation that litigation funders be licensed, stating that the Courts (rather than the corporate regulator) would be the appropriate avenue for the policing of claims, as funding deals are not financial products and would fall outside its remit. Presumably, the definition of managed investment scheme (interests in which are a regulated financial product) will be expanded to cover this.
What next?
If the proposed regulatory changes announced by the Government are unopposed by Parliament, the changes will take effect later this year, in August.
The Federal Government has also announced the establishment of a Parliamentary Joint Committee on Corporations and Financial Services. The Committee will be conducting an inquiry into the class action industry (and the regulation of the industry), with a final report to be tendered by 07 December 2020.
In the meantime, the Committee has invited submissions on whether the current regulation of the class action industry is affecting fair and equitable outcomes for plaintiffs. The deadline for submissions is 11 June 2020.
For more information, or to discuss financial services queries in general, please contact Venn King or another member of KHQ’s Corporate & Commercial team, on +61 (0)3 9663 9877 or contact@khq.com.au.
