Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2019-2020-2021
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
CORPORATIONS AMENDMENT (IMPROVING OUTCOMES FOR LITIGATION
FUNDING PARTICIPANTS) BILL 2021
EXPLANATORY MEMORANDUM
(Circulated by authority of the
The Treasurer, the Hon. Josh Frydenberg MP)
Table of contents
Glossary................................................................................................. 1
General outline and financial impact ...................................................... 3
Chapter 1 Improving outcomes for litigation funding
participants .................................................................. 5
Chapter 2 Statement of Compatibility with Human Rights .......... 21
Attachment A Supplementary regulatory impact analysis ............... 25
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ALRC Australian Law Reform Commission
ALRC Report Report of the ALRC, Integrity Fairness and
Efficiency- An Inquiry into Class Action
Proceedings and Third-Party Litigation
Funders
ASIC Australian Securities and Investments
Commission
Bill Corporations Amendment (Improving
Outcomes for Litigation Funding
Participants) Bill 2021
Corporations Act Corporations Act 2001
Corporations Regulations Corporations Regulations 2001
ICCPR International Covenant on Civil and Political
Rights
PJCCFS Report Report of the Parliamentary Joint Committee
on Corporations and Financial Services'
inquiry into litigation funding and the
regulation of the class action industry
1
General outline and financial impact
Improving outcomes for litigation funding participants
The Bill amends Chapter 5C of the Corporations Act to implement the
government response to recommendations 7, 11, 12, 13, 16, 18 and 20 of
the PJCCFS Report.
The amendments establish a new kind of managed investment scheme, a
class action litigation funding scheme, and introduce additional
requirements for the constitutions of managed investment schemes that
are class action litigation funding schemes. The measure ensures that
returns to litigation funders out of the claim proceeds of a scheme are fair
and reasonable.
Date of effect: The Bill commences the day after the Act receives the
Royal Assent
Proposal announced: This Bill partially implements the Government
Response1 to the PJCCFS Report2 and ALRC Report3.
Financial impact: Nil.
Human rights implications: The Bill does not raise any human rights
issue. See Statement of Compatibility with Human Rights -- Chapter 2.
Compliance cost impact: Average annual regulatory costs of $68,000 to
$95,000 regulatory costs per annum.
Summary of regulation impact statement
Regulation impact on business
Impact: Average annual regulatory costs of $68,000 to $95,000
regulatory costs per annum.
1
Government response to the PJCCFS Report -
https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22publicatio
ns%2Ftabledpapers%2Fbd9f54b1-4348-4b27-ab09-11c362300500%22
2
PJCCFS Report -
https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22publicatio
ns%2Ftabledpapers%2Fbb5456bf-cca9-4d35-9fb8-c3596088b457%22
3
ALRC Report -
https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;adv=yes;orderBy=date-
eFirst;page=3;query=Dataset%3Atabledpapers%20Decade%3A%222010s%22%20Year%3
A%222019%22%20%22Australian%20Law%20Reform%20Commission%22;rec=10;resCo
unt=Default
3
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
Main points:
This Bill gives rise to a range of regulatory impacts on businesses, as set
out in the PJCCFS and ALRC Reports. The PJCCFS and ALRC Reports
have been certified as independent reviews which involved a process and
analysis equivalent to a Regulation Impact Statement. To address the gap
in analysis between the PJCCFS and ALRC inquires and the
Government's consideration of options for class action and litigation
funding reform, supplementary analysis on the costs, benefits and risks
associated with the new measures was prepared, consistent with the
Australian Government Guide to Regulatory Impact Analysis. The
supplementary analysis is included at Attachment A. A number of the key
impacts identified are listed below.
• Litigation funders will experience greater barriers to charging
unfair and disproportionate fees and commissions in class
actions, reducing the availability of windfall profit making.
• Litigation funders may be incentivised to undertake greater
'book building' to inform their decision to support a class
action, which entails identifying, communicating with, and
enrolling class members to the action.
• Litigation funders will gain certainty and clarity about court
powers to intervene in litigation funding agreements, and
how courts will assess a proposed distribution of claim
proceeds under a class action litigation funding schemes.
• Litigation funders may experience greater uncertainty about
the enforceability of some litigation funding agreements and
their returns in class action proceedings, although this
uncertainty is likely to abate over time with the development
of precedent.
• Litigation funders may experience a reduced funding
appetite, especially in respect of cases in which they would
previously have received a windfall return.
• Litigation funders may be subject to additional administrative
and compliance costs to comply with the new regulatory
requirements.
4
Chapter 1
Improving outcomes for litigation funding
participants
Outline of chapter
1.1 The Bill amends Chapter 5C of the Corporations Act to
implement the government response to recommendations 7, 11, 12, 13,
16, 18 and 20 of the PJCCFS Report.
1.2 The amendments introduce a new class of managed investment
scheme called a class action litigation funding scheme. These amendments
also introduce additional requirements within Chapter 5C of the
Corporations Act for these types of managed investment schemes.
1.3 The amendments also provide that a Court must approve, as fair
and reasonable, the proposed distribution of the claim proceeds achieved
in a class action funded by a class action litigation funding scheme. The
Court must approve this distribution between the members of the scheme
and entities that are not members of the scheme, for example, the
litigation funder. These amendments provide that a Court may vary a
proposed distribution to ensure it is fair and reasonable.
Context of amendments
1.4 Third party litigation funding schemes ordinarily involve an
entity that is not a party to a proceeding in a court (a litigation funder)
paying the costs of the litigation for a party and indemnifying that party
against an adverse cost order. The litigation funder accepts this financial
burden in return for a share of the proceeds if the litigation is successful.
1.5 An interest in a litigation funding scheme or arrangement is a
'financial product' under Chapter 7 of the Corporations Regulations. Class
action litigation funding schemes are litigation funding schemes which are
set up to fund class action proceedings on behalf of a class of plaintiffs.
The law regulating class action litigation funding schemes has changed
significantly over the past decade.
1.6 In 2009 a majority of the Full Court of the Federal Court
determined that a litigation funding scheme falls within the general
definition of a managed investment scheme in section 9 of the
Corporations Act (see Brookfield Multiplex Limited v International
Funding Partners Pty Ltd (2009) 180 FCR 11).
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
1.7 Amendments to Chapter 5C of the Corporations Regulations
were made shortly after the Brookfield decision to exempt litigation
funding schemes from complying with the regulatory framework for
managed investment schemes in Chapter 5C of the Corporations Act.
1.8 The Corporations Amendment (Litigation Funding)
Regulations 2020 removed this exemption with respect to class action
litigation funding schemes. That instrument, among other things, also
amended the Corporations Regulations to require entities that deal in class
action litigation funding schemes to hold an AFS Licences.
1.9 A class action ordinarily involves a representative plaintiff,
pursuing a claim on behalf of a larger group that has a substantially
similar claim. Without the support of a litigation funder, the representative
plaintiff may not have the financial resources to fund the action. Further,
without an indemnity for costs provided by a litigation funder, the
representative plaintiff would be exposed to liability in the event of an
adverse cost order made during the proceedings.
1.10 The ALRC undertook an inquiry into Class Action Proceedings
and Third-Party Litigation Funders and tabled its final report in
Parliament on 24 January 2019. The report examined the increased
prevalence of class action proceedings and the adequacy of regulation
around the distribution of proceeds. Recommendation 14 of the ALRC
Report endorsed Court approval of third-party litigation funding
agreements or percentage-based fee agreements to protect the interests of
class members.
1.11 On 21 December 2020, the Parliamentary Joint Committee on
Corporations and Financial Services tabled its report on litigation funding
and the regulation of the class action industry. The Committee determined
that litigation funding plays a vital role in enabling individuals to access
the civil justice system by minimising the risk of an adverse cost order.
1.12 The Committee raised significant concerns over the inadequacy
of the regulatory arrangements for litigation funders. The Committee was
also concerned that the proportion of proceeds obtained by litigation
funders is often disproportionate to the cost and risk undertaken by those
funders, resulting in a significant reduction of the share to class members.
1.13 The PJCFFS Report consisted of 31 recommendations including
recommendation 11 which recommended providing the Court with power
to approve litigation funding agreements and reject, vary or amend the
terms of agreement in the interests of justice.
1.14 Recommendation 20 of the PJCCFS Report called on the
Government to consult on the design of a guaranteed statutory minimum
rate of return for class members. Consistent with this recommendation, the
Treasury and Attorney-General's Department undertook consultation in
6
Improving outcomes for litigation funding participants
June 2021 on design elements of guaranteeing a statutory minimum return
to class members.
1.15 The Bill implements the Government's response to
recommendations 7, 11, 12, 13, 16, 18, and 20 of the PJCCFS report. To
the extent of any inconsistency between those recommendations of the
PJCCFS Report, or its discussion of those recommendations, the
Government's intention as expressed in the Bill and this Explanatory
Memorandum should prevail.
Summary of new law
1.16 The Bill amends Chapter 5C of the Corporations Act to establish
a new kind of managed investment scheme called a class action litigation
funding scheme. This measure aims to ensure that under such schemes,
the proposed distribution of the scheme's proceeds between members of
the scheme and non-members is fair and reasonable.
1.17 The amendments provide that a Court must approve, as fair and
reasonable, the proposed distribution of the claim proceeds between the
members of the scheme and entities that are not members of the scheme.
A Court may vary a proposed distribution to ensure that it is fair and
reasonable.
1.18 The amendments provide that the members of a class action
litigation funding scheme are only those claimants in the relevant
litigation proceedings who have agreed to become members of the scheme
and have agreed to be subject to the terms of the scheme's constitution.
1.19 A Court is required to assume that a distribution of the claim
proceeds of the scheme to entities that are not members of the scheme is
unfair and unreasonable if the distribution to those entities is greater than
30 percent of the total claim proceeds of the scheme. This a rebuttable
presumption.
1.20 When determining if a distribution is fair and reasonable, the
Court must consider certain factors about the scheme and the proceedings.
These factors include whether the costs incurred in the scheme and the
proceedings were reasonable, and the relative profit of the funder
compared with the costs incurred by the funder in funding the
proceedings.
1.21 The Court must also receive and consider a report from a
litigation funding fees assessor and the representations of a contradictor,
unless it is in the interests of justice to not do so. The litigation funder is
required to undertake to pay the fees of such people assisting the Court.
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
1.22 Litigation funders cannot enforce the proposed distribution
method until a Court has made an order to approve or vary the proposed
claim proceeds distribution method.
1.23 Litigation funders are also not able to enforce the proposed
claim proceeds distribution method if the relevant court makes an order
which extends a liability to pay the funder's fee or commission to class
members who are not members of the class action litigation funding
scheme (i.e. who have not agreed to become a member of the scheme).
This reflects a key intention of the Bill that only those plaintiffs who have
consented to become members of the class action litigation funding
scheme are liable to contribute to the litigation funder's fee or
commission.
1.24 Such orders do not include an order that non-members of the
scheme who are claimants to the class action must contribute, on a pro
rata basis, to the legal costs incurred in bringing the claim.
1.25 The amendments also require litigation funding agreements to
specifically state that the agreement is governed by the law of an
Australian jurisdiction with disputes regarding the agreement to be heard
in an Australian Court.
1.26 The procedures and powers introduced in the Bill are incidental
to class action proceedings in federal jurisdiction. If a litigation funder is
funding an action in non-federal jurisdiction, the Court in which the action
takes place must either be able to make the orders proposed in the
amendments, or be able to make substantially similar orders, for the
proposed distribution method to be enforceable by the funder.
Comparison of key features of new law and current law
New law Current law
Class action litigation funding No equivalent
schemes are established as a kind of
managed investment scheme. The
members of a class action litigation
funding scheme are only those
claimants who have agreed in
writing to be members of the scheme
and have agreed to be bound by the
terms of the scheme's constitution.
In a class action litigation funding No equivalent
scheme, the constitution of the
scheme must provide that any
litigation funding agreement under
the scheme must state the method for
8
Improving outcomes for litigation funding participants
New law Current law
determining the amount of any claim
proceeds for the scheme that is to be
distributed to any entities that are not
members of the scheme.
The method for determining the No equivalent
distribution of the scheme's claim
proceeds in a litigation funding
agreement is only enforceable if a
court approves the method as fair
and reasonable, or varies the
agreement to ensure it is fair and
reasonable.
When approving or varying a No equivalent
proposed distribution method, the
court must only consider the
prescribed factors and the rebuttable
presumption that if more than 30
percent of that scheme's claim
proceeds is proposed to be
distributed to entities other than the
members of the scheme, that the
distribution method is unfair and
unreasonable. The court must also
consider the report of a fees assessor,
and representations of a contradictor
unless it is interests of justice to not
do so.
The litigation funding agreement No equivalent
must contain an undertaking from
the litigation funder that the funder
would pay the reasonable costs of the
fees assessor and contradictor.
The litigation funding agreement No equivalent
must state that the governing law of
the agreement is the law of an
Australian jurisdiction, and disputes
regarding the agreement are to be
heard in an Australian court.
The claim proceeds distribution All parts of a litigation funding
method in a litigation funding agreement are enforceable if the
agreement is only enforceable where associated action is brought in any
the class action proceedings are in Australian court subject to the rules
federal jurisdiction, or in a court of the court.
exercising non-federal jurisdiction,
where that court has powers to make
substantially similar orders regarding
whether the claim proceeds
9
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
New law Current law
distribution method is fair and
reasonable. Additionally, the
distribution method in the litigation
funding agreement is unenforceable
if the court makes an order imposing
liability for the funder's fee or
commission on claimants in the
proceeding who are not members of
the scheme.
Detailed explanation of new law
1.27 The amendments to Chapter 5C of the Corporations Act provide
a framework for the court-based regulation of the share of the claim
proceeds of a class action litigation funding scheme that is distributed to
entities that are not members of the scheme.
1.28 Class action litigation funding schemes are managed investment
schemes and are regulated by Chapter 5C of the Corporations Act. Class
action litigation funding schemes must comply with the regulatory scheme
of Chapter 5C. The amendments insert additional requirements for
managed investment schemes that are class action litigation funding
schemes.
1.29 The basic regulatory requirements for a managed investment
scheme are that:
• The scheme must be registered with ASIC where the scheme
has more than 20 members or was promoted by a person
engaged in a business promoting such schemes;
• The scheme must have a responsible entity that operates the
scheme and holds the scheme property on trust for scheme
members; and
• The scheme must have a constitution that is compliant with
Part 5C.3 of Chapter 5C of the Corporations Act.
Definitions
1.30 Managed investment schemes are defined in section 9 of the
Corporations Act. Class action litigation funding schemes were deemed to
be managed investment schemes as a result of the decision of the Full
Court of the Federal Court of Australia in Brookfield Multiplex Limited v
International Litigation Funding Partner Pte Ltd (2009) 190 FCR 11 (see
paragraph 1.6).
10
Improving outcomes for litigation funding participants
1.31 The amendments establish a class action litigation funding
scheme as a type of managed investment scheme. [Schedule 1, item 2,
section 9 of the Corporations Act 2001]
1.32 Class action litigation funding schemes engage a funder to
provide upfront payment of legal costs associated with the class action
and the scheme. The funder may also provide an indemnity in favour of
the representative plaintiff against any adverse costs order in the
proceeding. The funder accepts this financial burden in exchange for a
portion of the proceeds of the claim, should it be successful. This portion
serves to reimburse the costs incurred by the funder and to pay a
commission or fee, pursuant to a litigation funding agreement. [Schedule 1,
items 1 and 5, sections 9 and 9AAA of the Corporations Act 2001]
1.33 To be a class action litigation funding scheme, the proceedings
must seek a remedy for a class of seven or more claimants in a class
action proceeding that some or all of the claimants in the proceeding may
be legally entitled to. The dominant purpose of the scheme is to seek
remedies that those claimants may be legally entitled to, where the claims
relate to the same, similar or related transactions, or where a Court decides
that the claims can be appropriately dealt with together.
1.34 A member of a class action litigation funding scheme is a person
who is a claimant in the proceedings and has agreed in writing to be a
member of the scheme and be bound by the terms of the scheme's
constitution. Only these persons can become members of the scheme.
[Schedule 1, items 3 and 4, section 9 of the Corporations Act 2001]
1.35 These provisions directly govern who is and is not considered a
member of the class action litigation funding scheme. It ensures that a
claimant cannot be co-opted into becoming a member of the scheme
litigation funding scheme, and therefore subject to the requirements of the
scheme such as contributing to the funder's fee or commission, without
their active consent.
1.36 The provisions also prevent the responsible entity, litigation
funder, lawyers and other service providers involve in the legal
proceedings (who are not claimants) from being considered members of
the scheme.
1.37 Class action proceedings are the legal proceedings of a court
though which the members of a litigation funding scheme seek to realise
potential legal remedies. Depending on the claim sought, there may be
other claimants in the proceeding who are not members of the class action
litigation funding scheme because they have not agreed in writing to be a
general member of the scheme and be bound by the scheme's constitution.
Each proceeding must comply with the legislation and rules of the court in
which the class action is being heard. [Schedule 1, item 1, section 9 of the
Corporations Act 2001]
11
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
1.38 The claim proceeds of the scheme is the gross remedy obtained
by the members of the scheme together with the sum of any orders for the
other side to contribute to the costs of the plaintiffs. The remedy can
include money, or money's worth, such as shares. [Schedule 1, item 1,
section 9 of the Corporations Act 2001]
1.39 If a scheme is structured for the purpose, other than an incidental
purpose, of avoiding the definition of a class action litigation funding
scheme, such a scheme is deemed to be a class action litigation funding
scheme. These schemes must comply with the requirements in Chapter 5C
of the Corporations Act for class action litigation funding schemes.
Structuring a scheme in this way to avoid the definition is a
corporation/scheme civil penalty provision. The civil penalty provision
will apply to conduct occurring after the commencement of the
amendments. [Schedule 1, items 5 and 8, sections 9AAA(2) and 1317E(3) of the
Corporations Act 2001]
Requirements for the constitution of a class action litigation funding
scheme
1.40 A registered managed investment scheme is governed by a
legally enforceable constitution that complies with Part 5C.3 of the
Corporations Act. ASIC may not register a scheme if the scheme's
constitution does not meet the requirements of that Part (see
section 601EB of the Corporations Act). If a scheme that is required to be
registered is not registered, that scheme may be wound up in accordance
with section 601EE of the Corporations Act.
1.41 Each managed investment scheme is operated by a Responsible
Entity. The Responsible Entity must be a public company that holds an
Australian Financial Services License that allows it to operate a scheme.
1.42 The amendments provide that the constitution of a managed
investment scheme that is a class action litigation funding scheme must
require a litigation funding agreement under the scheme to specify:
[Schedule 1, item 6, section 601GA(5) of the Corporations Act 2001]
• that each funding agreement under the scheme must outline
the same method for determining the distribution of claim
proceeds to entities that are not members of the scheme (the
claim proceeds distribution method);
• that any entity that is to be receive part of the distribution of
the claim proceeds, and is not a member of the scheme, must
be a party to a funding agreement under the scheme;
• that any claim proceeds for the scheme must not be
distributed unless and until the claim proceeds distribution
method has been approved by a Court as fair and reasonable
12
Improving outcomes for litigation funding participants
or a Court has varied the method to make it fair and
reasonable;
• that the litigation funder will pay the reasonable costs of the
fees assessor or contradictor appointed by the Court to assist
it in determining if the proposed method of distribution is fair
and reasonable; and
• that the agreement is subject to the law of an Australian
jurisdiction, and that disputes in relation to the agreement
must be heard in an Australian Court.
The method for determining the distribution of claim proceeds
1.43 Generally, a litigation funding agreement provides for the
litigation funder to pay all or some administrative and legal costs
associated with bringing the class action and running the scheme. The
funder may contract other entities to provide services for the scheme with
a view to being reimbursed from the claim proceeds of the scheme. The
funding agreement is an agreement between the scheme, the funder and
any other service provider not paid directly by the funder, which may
include the members' lawyers. It is not intended that members of the
scheme will be party to the funding agreement.
1.44 The funder may also assume the liability of a costs order made
against a representative plaintiff. The funder offers the promise to fund the
scheme and assume this liability in exchange for reimbursement of costs
and a fee or commission which is calculated as a portion of the remedy
obtained by scheme members.
1.45 The amendments provide that for a class action litigation
funding scheme that is a managed investment scheme, the constitution of
the scheme must provide that any litigation funding agreement made in
relation to the scheme must state the method for determining the
distribution of the claim proceeds to any entity other than the members of
the scheme (the claim proceeds distribution method). [Schedule 1, item 6,
section 601GA(5)(a)(ii) of the Corporations Act 2001]
1.46 However, if an entity other than a member of the scheme is to
directly receive a portion of the claim proceeds, that entity must be a party
to a litigation funding agreement under the scheme. This ensures that the
Court has oversight of the claim proceeds distribution method and can
take into account any and all costs that are proposed to be deducted from
the final remedy achieved through the claims of the members of the
scheme.
1.47 The claim proceeds distribution method is intended to perform
two functions. First, the claim proceeds distribution method is intended to
determine what amount of the claim proceeds should, in aggregate, be
paid or distributed to the entities that are not members of the scheme and
13
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
are party to the funding agreement, to reimburse them for their costs and
determine any fee or commission. Second, it is intended to determine the
amount of the claim proceeds that is to be paid or distributed to those
entities. A key intention of the Bill is that those entities receive no more
than what is fair and reasonable, thereby maximising the claim proceeds
that can be paid or distributed to members.
1.48 The total amount of claim proceeds that remain, after working
out the amount for the entities that are not members of the scheme and are
parties to the agreement, must be paid or distributed to the scheme's
members. The claim proceeds distribution method is not intended to, and
should not, outline how the claim proceeds are to be distributed among the
members of the scheme (how each member's individual claim is worked
out).
The costs of a fee assessor and contradictor
1.49 When determining if a proposed claim proceeds distribution
method is fair and reasonable, the Court must consider, unless it has
ordered otherwise, the report of a person appointed to inquire into and
report on the fairness and reasonableness of the distribution (a fees
assessor). The Court must also consider arguments made by a person
appointed by the Court to act as contradictor, regarding the proposed
distribution of claim proceeds, unless the Court considers it would not be
in the interests of justice to do so (see paragraph 1.79).
1.50 The constitution of a class action litigation funding scheme must
provide that any litigation funding agreement must contain an undertaking
by the litigation funder to pay the reasonable costs of the fees assessor and
the contradictor. This requirement only applies to the costs incurred in
assisting the Court in making its order as to whether the proposed
distribution of claim proceeds is fair and reasonable. [Schedule 1, item 6,
sections 601GA(5)(a)(v) and 601GA(6) of the Corporations Act 2001]
1.51 These requirements collectively address the substance of
recommendations 13 and 16 of the PJCCFS Report which sought to
enhance the use of litigation funding fee assessors as referees. The Bill
goes beyond the PJCCFS Report by mandating their use, unless the
interests of justice require otherwise, and requiring the funder to meet
their costs. This is in recognition of the important role that funding fee
assessors play and to uphold the principle that funders should bear
responsibility for providing that a proposed claim distribution method is
fair and reasonable.
1.52 Requiring litigation funders to contribute to the costs of a fees
assessor and contradictor is done to encourage the funder to structure the
method of distribution of the claim proceeds in a way which would be
clearly fair and reasonable when the Court makes an order to approve or
vary the claim proceeds distribution method. A clearly fair and reasonable
14
Improving outcomes for litigation funding participants
distribution method would reduce costs when the court needs to make the
determination. This determination happens when the proceedings are
progressed enough for the determination to occur.
Jurisdiction
1.53 The constitution of a managed investment scheme that is a class
action litigation funding scheme must provide that any litigation funding
agreement made in relation to the scheme must state: [Schedule 1, item 6,
section 601GA(5)(b) of the Corporations Act 2001]
• that the agreement is governed by the law of an Australian
jurisdiction (i.e a specific state or territory); and
• that any disputes in relation to the agreement must be heard
in an Australian Court.
1.54 This requirement implements the Government's response to
recommendation 12 of the PJCCFS Report. The amendment would
require the litigation funding agreements for all class action litigation
funding schemes to state that the governing law of the agreement is that of
an Australian jurisdiction.
1.55 All class action litigation funding schemes must adopt the
requirements mentioned in paragraph 1.42 in their constitutions. The
requirements apply to all class action litigation funding schemes in
Australia, not just schemes funding class actions brought in the Federal
Court of Australia.
Enforceability of funding agreements
1.56 The claim proceeds distribution method in a litigation funding
agreement is enforceable only if: [Schedule 1, item 7, section 601LF(1) of the
Corporations Act 2001]
• The court approves, as fair and reasonable, a claim proceeds
distribution method outlined in the litigation funding
agreement;
• The court has varied the claim proceeds distribution method
outlined in the litigation funding agreement to ensure that the
method is fair and reasonable; and
• The court in the proceeding does not make a common fund
order.
1.57 When considering whether the distribution method is, or is as
varied, fair and reasonable, the Court must consider the prescribed test
introduced in these amendments (see paragraphs 1.65 to 1.80). [Schedule 1,
item 7, sections 601LF(1), 601LF(2)(b), 601LF(3)(c) and 601LF(4)(c) of the
Corporations Act 2001]
15
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
1.58 If a funded class action proceeding is in federal jurisdiction, the
Court hearing that proceeding is empowered to make orders to approve or
vary the claim proceeds distribution method in a litigation funding
agreement subject to the requirements of making such orders.
1.59 The claim proceeds distribution method is not be enforceable if
the Court hearing the proceeding does not possess power to make an order
approving or varying the proposed distribution method to ensure it is fair
and reasonable, or a substantially similar order. This is particularly
relevant for class action litigation funding schemes funding actions in a
Court which is not exercising federal jurisdiction. [Schedule 1, item 7, section
601LF(1) of the Corporations Act 2001]
1.60 This provision protects members of class action litigation
funding schemes and ensures that the claim proceeds distribution method
in each litigation funding agreement is fair and reasonable.
1.61 The claim proceeds distribution method is also unenforceable if
the Court makes a common fund order in relation to the class action
proceeding. A common fund order is any order made by the Court for
claimants in the proceeding to contribute to the funder's renumeration
regardless of whether such claimants have agreed to be members or the
litigation funding scheme and have signed an agreement with the litigation
funder. For the purposes of the Bill, the renumeration of the funder does
not include reimbursement for the costs incurred in funding the
proceedings. Renumeration only describes the profit sought by the funder
in relation to the proceedings. [Schedule 1, item 7, section 601LF(2)(c) of
Corporations Act 2001]
1.62 This again reflects a key intention of the Bill that plaintiffs must
consent to become members to a class action litigation funding scheme,
and therefore agree to pay a fee or commission to the funder. A common
fund order does not include an order made by the Court to ensure that all
claimants in a proceeding contribute to the payment or reimbursement of
the legal costs incurred in the proceeding, on a pro rata basis. [Schedule 1,
item 7, sections 601LF(2)(c), 601LF(3)(d), 601LF(4)(d) and 601LF(7) of the
Corporations Act 2001]
1.63 The amendments do not authorise the court to make common
fund orders or assume that any court currently has the power to make
common fund orders. [Schedule 1, item 7, section 601LF(6) of the Corporations
Act 2001]
1.64 The amendments also do not require common fund orders to
state the funders renumeration as a percentage of the share proceeds. That
is generally however how common fund orders seek to calculate the fee or
commission of the litigation funder.
16
Improving outcomes for litigation funding participants
Determining whether the proposed method of distribution of claim
proceeds is fair and reasonable
Order to approve or vary claim proceeds distribution method
1.65 In order for the litigation funding agreement to be enforceable
with respect to claim proceeds distribution method proposed in the
agreement, the Court must approve the proposed distribution method as
fair and reasonable or vary the agreement to meet that standard. [Schedule 1,
item 7, section 601LF(1) of the Corporations Act 2001]
1.66 The amendments outline what the Court must and must not
consider when determining if a proposed distribution method is fair and
reasonable.
1.67 If the Court considers that the proposed claim proceeds
distribution method is fair and reasonable, the court may make an order to
approve that method. If the Court considers the proposed claim proceeds
distribution method in the agreement is not be fair and reasonable, the
Court may vary the agreement to ensure the method is fair and reasonable.
[Schedule 1, item 7, section 601LG(1) of the Corporations Act 2001]
1.68 If the Court varies the agreement's claim proceeds distribution
method, the Court also has the power to declare that the variation has
effect from a particular time. [Schedule 1, item 7, section 601LG(7) of the
Corporations Act 2001]
1.69 The Court must consider the prescribed factors, and only those
factors, when making an order to approve or vary the claim proceeds
distribution method in an agreement. The factors require the Court to
consider whether the proceedings have been managed in the best interests
of the members to minimise the legal costs for the proceedings. [Schedule 1,
item 7, section 601LG(3) of the Corporations Act 2001]
1.70 A key factor for the Court to consider is the comparative profit
of the funder, under the proposed claim proceeds distribution method,
compared with the actual costs incurred by the funder in funding the
proceeding. For example, in considering whether a claim proceeds
distribution method is fair and reasonable, the Court may consider
whether a larger or smaller than normal return on investment is fair and
reasonable in the circumstances. Other factors also draw the Court's
attention to the reasonableness of the costs incurred in relation to the
proceedings and in the running of the scheme.
1.71 The commercial return of the funder is intended to be assessed
by reference to the cost of capital needed by the funder to fund the
reasonable costs of the proceeding.
1.72 When conducting the test, the Court will assess the
reasonableness of any costs incurred by the funder or paid for by the
funder under the agreement that relate directly to the proceedings. The
17
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
Court is not permitted to assess any unreasonable costs incurred by or paid
for by the funder or any costs that do not directly relate to the
proceedings, for example, the fixed overheads of the funder. The Court's
consideration of the costs incurred in the proceeding must examine if the
costs incurred separately and in aggregate are reasonable.
1.73 The Court must assume that a claim proceeds distribution
method which results in more than 30 percent of the total claim proceeds
for the scheme being distributed to entities other than the members of the
scheme is presumed to be unfair and unreasonable. This is a rebuttable
presumption which the Court can set aside if, considering the prescribed
factors, the claim proceeds distribution method is fair and reasonable.
[Schedule 1, item 7, section 601LG(5) of the Corporations Act 2001]
1.74 The amendments allow regulations to omit, modify or vary the
factors the Court must consider when deciding whether the claim proceeds
distribution method is fair and reasonable. [Schedule 1, item 7, section 601LG(4)
of the Corporations Act 2001]
1.75 This modification power is necessary so that the fairness and
reasonableness test remains a relevant and appropriate protection for class
members into the future. There is a potential for new factors to be relevant
to the Court's consideration of the test as the conduct of litigation funding
schemes, the types of matters that are funded, and the entities and
claimants involved in such schemes evolve to suit commercial
circumstances. The industry evolves rapidly in response to new
regulations and standards for litigation funding.
1.76 It is necessary for these changes to be made in regulations so
that Government can quickly act to recognise new practices and to protect
the interests of the members of class action litigation funding schemes.
1.77 In order to ensure that the test is always relevant and provides
effective protection for members of the scheme, the Government should
be able to respond to new developments by modifying the test with
respect to factors the Court must consider when conducting the test.
1.78 The modification power only operates on the factors that the
Court must consider, it does not operate on the rebuttable presumption.
The modification power will be exercised through a disallowable
instrument, meaning Parliament can maintain control over the use of this
modification power. The Court will always determine whether the claim
distribution method is fair and reasonable in light of the prescribed
factors, which may be modified by regulations, and the rebuttable
presumption.
Referee report and representations by contradictor
1.79 In making the order to approve or vary the claim proceeds
distribution method, the Court must, unless it is in the interests of justice
to not, receive and consider a report from a person who has inquired into
18
Improving outcomes for litigation funding participants
the proposed claim proceeds distribution method. The role of the fee
assessor is ultimately to assist the Court in determining if the proposed
method is fair and reasonable, and to provide their opinion on whether the
proposed method requires variation.
1.80 The Court must also consider representations made by a person
representing the interests of the members of the scheme as a contradictor
unless it is in the interests of justice to not. This requirement extends only
to the representations relevant to the claim proceeds distribution method,
and if the method can be considered fair and reasonable. The role of this
person is to act in the interests of the members of the scheme when the
Court is considering whether to approve of vary the claim proceeds
distribution method. [Schedule 1, item 7, section 601LG(6) of the Corporations
Act 2001]
Application to the Court
1.81 An application to the Court in regards to a litigation funding
agreement in a class action litigation funding scheme may be made by a
party to the funding agreement, a member of the scheme , the responsible
entity for the scheme, or by the Court on its own initiative [Schedule 1,
item 7, section 601LG(8) of the Corporations Act 2001]
Application and transitional provisions
1.82 The Bill commences on the day after the Act receives the Royal
Assent.
1.83 The amendments in the Bill apply only where: [Schedule 1, item 9,
section 1688 of the Corporations Act 2001]
• The funding agreement for the scheme is entered into on or
after the commencement of the amendments; and
• The class action litigation funding scheme is created on or
after the commencement of the amendments, whether or not
it existed as a different type of managed investment scheme
prior to the commencement of the amendments; and
• Where the proceedings in relation to the class action
litigation funding scheme are commenced in a Court on or
after the commencement of the amendments.
19
Chapter 2
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Corporations Amendment (Improving Outcomes for Litigation Funding
Participants) Bill 2021
2.1 The Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
2.2 The Bill amends Chapter 5C of the Corporations Act to
implement the government response to recommendations 7, 11, 12, 13,
16, 18 and 20 of the PJCCFS Report.
2.3 The amendments introduce a new class of managed investment
scheme called a class action litigation funding scheme. These amendments
introduce additional requirements within Chapter 5C of the Corporations
Act for these types of managed investment schemes.
2.4 The amendments also provide that a Court must approve, as fair
and reasonable, the proposed distribution of the claim proceeds achieved
in a class action funded by a class action litigation funding scheme
between the members of the scheme and entities that are not members of
the scheme, for example, the litigation funder. A Court may vary a
proposed distribution to ensure it is fair and reasonable.
Human rights implications
2.5 Article 14 of the ICCPR recognises the right to a trial and
hearing. This is a fundamental part of the rule of law and the proper
administration of justice. This provides that all persons are equal before
the courts and tribunals and have access to justice. This right applies to
both criminal and civil proceedings.
2.6 Under this right, all people are to have equal access to courts.
No one should be barred from access courts or tribunals (except in limited
exceptions). The United Nations Human Rights Committee (UNHCR) has
21
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
stated that the right to a fair trial and a fair hearing may only limited in
strict circumstances.
2.7 The UNHCR has also noted that the imposition of fees on the
parties to proceedings that would de facto prevent their access to justice
might give rise to human rights concerns.
2.8 Currently, there is no standard in the law that provides for a
minimum return to members of a class action litigation funding scheme.
The amendments in the Bill seek to introduce a court-based mechanism
for regulating the portion of the final remedy achieved in a class action
that is to be distributed to entities that are not members of a class action
litigation funding scheme.
2.9 Some arguments suggest that such regulation would reduce
access to justice because litigation funding firms may conclude that the
funding of potential actions would not be in their financial interests. And
therefore, less claims will be brought. However, there is nothing in this
Bill that prevents any claims from being brought before a Court.
2.10 The Bill seeks to regulate, in funded proceedings, the return to
the litigation funder and other third parties out of the claim proceeds
achieved by the claimant members of the scheme.
2.11 The Bill recognises that litigation funders play an important role
in facilitating the bringing of class actions. The Bill recognises the rights
of claimants and a funder to contract for the provision of litigation funding
services. But the Bill also addresses a key gap in regulation where the
share of the claim proceeds that ultimately ends up with entities that are
not claimants in the proceedings, is not regulated through a recognisable
standard.
2.12 Without the regulation proposed in the Bill, litigation funders
may continue to claim a higher share of proceeds from class actions than
would be reasonable in a commercial and justice context. The proceeds of
a class action represent the compensation or resolution sum of a claim
brought by claimants against a defendant. It is in the interests of justice to
ensure that the portion of the claim proceeds that is distributed to non-
claimants is fair and reasonable. The Bill provides the mechanism to
achieve that outcome.
2.13 The requirement that such a distribution be fair and reasonable
promotes the right to have access to justice because it ensures that the
portion of a claimant's remedy to a non-claimant is only done on a fair
and reasonable basis. The amendments provide protection against windfall
profits and disproportionate returns at the expense of claimants.
22
Statement of Compatibility with Human Rights
Conclusion
2.14 The Bill is compatible with human rights and freedoms as it
promotes the right to trial and hearing in Article 14 of the ICCPR.
23
Attachment A
Supplementary regulatory impact analysis
Background
In December 2017, the Government commissioned the Australian Law Reform
Commission (ALRC) to conduct an inquiry into class actions and litigation funding.
The terms of reference required the ALRC to consider, among other things, issues
surrounding the fairness and efficacy of Australia's class actions and third-party
litigation funding regimes, including the costs of class action proceedings, the
distribution of proceeds and the absence of regulation to address the structure,
operation and terms on which third-party funding entities participate in the Australian
legal system. The ALRC's report was tabled in Parliament on 24 January 2019 and
included 24 recommendations to federal, and state and territory governments, the
Federal Court of Australia (Federal Court) and the legal profession.
In May 2020, the Government referred an inquiry to the Parliamentary Joint
Committee on Corporations and Financial Services (PJC) to further scrutinise the class
action regime and the litigation funding industry. The referral was made to enable the
ALRC's recommendations to be tested and refined, while providing an additional
evidence base for legislative changes. In particular, the PJC inquired into whether the
present level of regulation, practices and procedure applying to Australia's growing
class action and litigation funding industry is appropriate and whether it is delivering
fair and equitable outcomes for class members. The PJC's report was tabled in
Parliament on 21 December 2020 and included 31 recommendations to the Australian
Government, the Federal Court, and legal associations responsible for developing
solicitor and barrister conduct rules.
The ALRC and PJC's findings relevantly included the following:
• the ALRC found that when litigation funders were involved in a class action, the
median return to class members was 51 per cent, compared to 85 per cent when a
funder was not involved
• the PJC found litigation funders are, systemically and inappropriately, obtaining
windfall profits at the expense of class members.
Policy proposal
The policy proposal seeks to respond to a range of ALRC and PJC findings and
recommendations concerning litigation funding practices in the class action industry.
The relevant recommendations are set out in the Appendix to this paper.
25
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
Supplementary analysis
The ALRC and PJC reports include significant analysis, supported by extensive
consultation, as outlined below. Treasury and the Attorney-General's Department have
certified the reports address the first six Regulatory Impact Statement (RIS) questions
set out in The Australian Government Guide to Regulatory Impact Analysis (the RIS
Guide) for most elements of the policy proposal. These elements propose to implement
the PJC and ALRC recommendations in substantially the same form as set out in the
reports.
However in some cases, the policy proposal varies, extends or adds to the PJC and
ALRC recommendations, based on the PJC and ALRC's findings or additional
consultation undertaken by the Government.
These proposed variations, extensions or additions include:
• regulating the availability of Common Fund Orders (CFOs) with respect to
litigation funding agreements
• clarifying court powers to approve or vary the funding distribution method
included in funding agreements for a class action litigation funding scheme
• introducing a rebuttable presumption with respect to the maximum proportion of
the class action proceeds associated with a class action litigation funding scheme
which can be distributed to non-members of the scheme
• requiring courts to consider the report of a referee or views of a contradictor
where one is appointed, unless it is not in the interests of justice to do so, and
requiring the funder to cover the reasonable costs of the referee and contradictor,
unless a court orders otherwise
• extending the application of certain recommendations beyond proceedings in the
Federal Court, to proceedings commenced in State and Territory courts
• addressing conflicts arising when a lawyer for a class action litigation funding
scheme (or close associate) holds a material financial interest in the funder.
In accordance with the Australian Government's approach to the certification of
independent reviews, this paper provides analysis to supplement the PJC and ALRC
analysis for these aspects of the policy proposal, consistent with the RIS Guide. It also
seeks to respond to the seventh question in respect of the whole policy proposal.
The analysis in this paper is supported by the analysis included in the PJC and ALRC
reports and stakeholder feedback to the Government's consultations on various aspects
of the proposals in June and September 2021. Further detail on the consultations is set
out below. Feedback from the consultations has been referred to where relevant in this
paper.
26
Supplementary regulatory impact analysis
Consultation
ALRC and PJC inquiries
The ALRC's inquiry included multiple rounds of consultation:
• early consultation with several government agencies, academics, judges,
members of the legal profession, insurers and industry stakeholders within
Australia and internationally
• consultation on a discussion paper on which it received 107 submissions,
including from litigation funders and funding associations, law firms and legal
associations, companies, industry associations, consumer groups, regulators and
academics
• further consultations and workshops after receiving submissions, to ensure
interested parties could expand on matters that had been raised in their
submission and comment on new matters that had not previously been canvassed
in the discussion paper
• a series of consultations with relevant stakeholders in England and Wales.
The ALRC also received assistance from two expert panels that were established for
the inquiry.
The PJC sought submissions in response to its inquiry and subsequently received 101
submissions from a broad cross section of stakeholders. These included litigation
funders and litigation funding associations, class action litigation law firms, law
societies and legal associations, non-profit law and policy organisations, companies,
industry peak bodies, regulators, academics and individuals. The PJC also held public
hearings at which it heard evidence from stakeholders.
Government consultation on design elements of a guaranteed statutory
minimum return to class members
On 1 June 2021, the Treasurer and Attorney-General released a joint consultation in
response to recommendation 20 of the PJC report. The consultation was on possible
design elements of a statutory guaranteed minimum return of class action proceeds to
class members. In particular, the consultation sought views on:
• the best way to guarantee a statutory minimum return of the gross proceeds of a
class action (including settlements)
• whether a minimum gross return of 70 percent to class members, as endorsed by
some class action law firms and litigation funders, is the most appropriate floor
27
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
• whether a graduated approach taking into consideration the risk, complexity,
length and likely proceeds of the case is appropriate to ensure even higher returns
are guaranteed for class members in more straightforward cases.
Treasury and the Attorney-General's Department received 22 submissions in response
to the consultation, including from litigation funders, litigation funding associations,
legal associations, law firms and legal practitioners, industry bodies and companies
with experience as defendants.
Government consultation on a policy design
Using feedback from its June 2021 consultation, the Government developed proposed
reforms to the corporations law to address the concerns raised by the ALRC and PJC.
In September 2021, the Government released an exposure draft of the proposed
reforms for consultation. Treasury and the Attorney-General's Department received 19
submissions in response to the consultation, including from litigation funders, litigation
funding associations, legal associations, law firms and legal practitioners and industry
bodies. Feedback from this consultation was used to inform the final design of the
policy proposal.
SUPPLEMENTARY ANALYSIS OF RELEVANT ELEMENTS
OF POLICY PROPOSAL
1. Regulating the availability of Common Fund Orders
This element of the policy proposal varies PJC recommendation 7 and ALRC
recommendation 3 in addressing the problem of 'free-riding' in open class actions.
Free-riding occurs where class members who have signed a litigation funding
agreement are required to contribute to the costs of the class action under the terms of
the agreement, but class members who have not signed the agreement would benefit
from the outcome of the class action (e.g. a settlement or judgment award) without
making a similar contribution.
The PJC and ALRC explored the range of mechanisms devised by the Federal Court to
address this issue and both concluded government intervention was required. Multiple
policy options were canvassed with various stakeholders during the course of the two
reviews to address this problem.
The two main options considered by Government were whether CFOs should be
expressly legislated for in this policy proposal or expressly prohibited, noting the
availability of other mechanisms that allow the court to ensure all members benefiting
from a class action contributed to its running costs. The costs and benefits of these two
options were covered in the PJC's report (paragraphs 9.47 - 9.95) and ALRC report
(paragraphs 4.27-4.35).
28
Supplementary regulatory impact analysis
Reasons for recommending this proposal
The Government's position is that it is desirable to ensure that the Federal Court is
properly empowered to make sure that all beneficiaries of a judgment or settlement
contribute to the costs of the class action (i.e. to avoid the free-rider problem). To do
this, the Government proposes to legislate that a litigation funding agreement is not
enforceable and has no effect unless the court does not make a CFO.
The Government proposes this approach noting that the courts have already developed
other mechanisms such as funding equalisation orders (FEOs) to address the free-rider
concerns raised by the ALRC and PJC. A FEO enables the Court to ensure that the
burden of costs associated with class action litigation is equitably shared amongst those
who gain a financial benefit from the action.
The PJC recommended CFOs over maintaining the status quo of using FEOs as it
noted it remained unclear whether FEOs could be used to modify a litigation funder's
commission rates. Likewise, the ALRC cited that one of the reasons it was supportive
of CFOs was that they would support its recommendation that courts have an express
statutory power to reject, vary, or amend the terms of a third-party litigation funding
agreement.
As set out in section 2 below, the Government proposes an explicit statutory power for
the courts to amend a funder's commission rate. This would complement the power of
a court to use a FEO to address the free-rider problem whilst addressing concerns
raised by the PJC of windfall profits to litigation funders by allowing them to multiply
out their commission rate across members of the class who have not agreed to join the
funding agreement. The plurality in BMW Australia Ltd v Brewster [2019] HCA 45
(Brewster) considered that FEOs were a better way of equitably spreading costs to
address the free-rider problem and noted that CFOs actually imposed an additional cost
on the group. The plurality noted that FEOs had the benefit of taking, as their starting
point, the actual costs incurred in litigation.
Endorsing CFOs in addition to this would have overlapped with the policy intention of
this proposal and the courts' current FEO powers. Jointly, these the proposed policy
and current FEO powers provide a solution to the free-rider problem but prevent
windfall profits to litigation funders.
The Government is also concerned about significant legal concerns that have been
identified about the use of CFOs. CFOs impose a litigation funding commission on
class members who have not expressly signed up to a litigation funding agreement.
This contravenes the fundamental common law doctrine of 'privity of contract', where
the rights and obligations of a contract are only extended to those who are party to it.
The majority in Brewster noted that unfunded group members have no contractual or
other relationship with the funder nor have any liability to the funder. The funder has
no right to claim a commission from these members under contract or under equitable
principles unless one is created under a CFO.
One of the key issues that remains outstanding in relation to CFOs is the uncertainty
surrounding the courts power to make such an order. This uncertainty arose after the
29
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
High Court in Brewster considered the question of whether the Federal Court and
Supreme Court of NSW had the power to make a CFO. The High Court held that CFOs
were not available at an early stage of a class action proceeding. However, the decision
left uncertain if CFOs were available at the settlement stage of proceedings. The PJC
noted this uncertainty was exhibited by divergent views expressed in subsequent
decisions of the Federal Court and raised by several stakeholders in their submissions
to the inquiry. The proposed approach would resolve this uncertainty and clarify the
position on CFOs.
The proposed approach also specifies membership of a class action litigation funding
scheme (which the proposal defines as a managed investment scheme (MIS)) consists
of only a claimant in the relevant class action. This clarifies existing market uncertainty
about whether lawyers and litigation funders are members of litigation funding
schemes, but is not expected to have any substantive impact on existing business
practices. The proposal further requires claimants to consent in writing to becoming
members of the scheme and be bound by the terms of the scheme's constitution. This is
consistent with requirements under the current legal framework surrounding active
members of litigation funding agreements that constitute a MIS and further reinforces
that funders cannot impose contractual obligations on plaintiffs who have not agreed to
join the scheme.
As a result of this approach, funders may decide to undertake a book build to inform
their decision to support a class action, by identifying, communicating with and
enrolling class members in the action and getting them to sign a litigation funding
agreement. The PJC has noted that this could lead to a greater level of investigation of
the level of interest among class members. Book building can ensure that the merits
and viability of a claim is assessed more thoroughly before a class action is
commenced.
Multiple submissions received through the Government's consultation on the policy
proposal in September 2021 argued for the retention of CFOs. Submitters argued that
CFOs addressed the free-rider problem whilst also allowing the court to vary a funder's
commission so that it is equitable. Both issues can be addressed through the proposed
policy package. In particular, it remains open to funders to have recourse to other
mechanisms developed by the courts such as FEOs.
Some stakeholders also highlighted the effect CFOs have on encouraging funders to
initiate open class actions. The availability of CFOs may encourage multiple funders to
seek to lodge competing class actions (even if this is ultimately settled through court
processes to manage such a circumstance). Further, the availability of a CFO may
mean that funders would not fully investigate the merits of a class action before filing
(notwithstanding the deterrent effect of adverse costs orders).
Arguments have also been made that CFOs magnify the size of claims and expected
recoveries for litigation funders. As noted above, in the plurality in Brewster indicated
that the equitable spreading of cost is better achieved through a FEO.
30
Supplementary regulatory impact analysis
2. Clarifying court powers to approve or vary funding
distribution methods
This element of the policy proposal is a variation of recommendation 11 of the PJC's
report and recommendation 14 of the ALRC report. Each recommendation centres on
enhancing judicial oversight of funder returns in line with the court's protective role in
class action proceedings.
Both recommendations require court approval of litigation funding agreements for
them to be enforceable and enable courts to alter, vary or amend the terms of an
agreement. In making those recommendations, both the PJC and ALRC focused
predominantly on the distribution of class action proceeds and the funders' contractual
entitlement. However, the recommendations represent significant intervention in
private contractual arrangements, as acknowledged by the ALRC. The ALRC also
noted a stakeholder submission explaining such a recommendation would create
uncertainty in litigation funding contracts.
To reduce such uncertainty, this proposal adopts a less interventionist approach to
addressing the problem of windfall profitmaking by litigation funders at the expense of
class members. It limits court approval and intervention in litigation funding
agreements only to the extent its terms concern the method of distributing claim
proceeds. This recognises and respects the right of parties to freely contract on the
other important aspects of class action funding agreements which do not contribute to
the policy problem identified by the PJC and ALRC.
Under this proposal, each funding agreement for a class action litigation funding
scheme would have to be in writing and include the same 'claim proceeds distribution
method' for distributing the proceeds to which scheme members are entitled under a
judgment or settlement. The method would be focused on determining the share of
these 'claim proceeds' that go to entities other than scheme members. The proposal
requires any such entity to be a party to a funding agreement for the scheme. This
approach captures any direct and indirect fee and commission mechanisms, including
legal costs, and minimises risk of 'leakage' of claim proceeds through expenses which
are not contemplated in the funding agreement.
Courts would be able to make orders to approve or vary the method to ensure it is fair
and reasonable. The proposal would prevent distribution of any claim proceeds unless
the court has made such orders to approve or vary the method. In making an
assessment about the fairness and reasonableness of a proposed distribution method,
courts would have to consider an exhaustive list of factors, including:
• the amount, or expected amount, of claim proceeds
• the funder's commercial return in comparison to the costs it incurred
• the legal costs incurred by or on behalf of scheme members and the
reasonableness of those costs
31
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
• other costs incurred by the funder or other parties to a funding agreement, and the
reasonableness of those
• whether the proceedings were managed in the best interests of scheme members
to minimise the costs incurred by them or on their behalf
• the risks accepted by each party to a funding agreement.
Funders would be prevented from structuring their arrangements to avoid being subject
to these provisions through an anti-avoidance provision, similar to those appearing
elsewhere in the Corporations Act 2001 (Corporations Act) and other Commonwealth
legislation.
Benefits and costs
Class members
This option would give rise to a range of benefits to the members of a class action
litigation funding scheme including:
• protection against windfall profit making and disproportionate returns to
litigation funders identified by the ALRC and PJC
• assurance that they will receive a court-assessed fair and reasonable share of their
claim proceeds in the proceeding
• greater certainty as to their returns in the relevant class action and how the court
will make an assessment about the proportion of total claim proceeds under the
scheme which will be used to compensate anyone who is not a scheme member.
Litigation funders
With respect to litigation funders, this element of the proposal:
• would prevent funders from extracting unfair returns from the claim proceeds
received by members of a class action litigation funding scheme and so reduce
instances of windfall profit making
• would provide greater certainty to funders about the court's power to intervene in
a litigation funding agreement
• would provide clarity about how courts will assess a proposed distribution of
class action proceeds between members and non- members of a class action
litigation funding scheme
• may increase uncertainty to funders about their returns in a class action and the
enforceability of their contracts, but this uncertainty is likely to abate over time
as precedent is developed regarding fair and reasonable returns
32
Supplementary regulatory impact analysis
• may reduce funding appetite, especially in situations where the funder may
otherwise receive windfall profit
• may increase administrative costs to litigation funders to revise litigation funding
agreements in compliance with the requirements regarding claim proceeds
distribution methods.
The proposal also retains flexibility for existing practices and arrangements for third
parties engaged to support the claimants' action. For example, if any such party is paid
by the funder, only the funder (who is already by definition a member of the funding
agreement) would need to be a party to the funding agreement if it seeks
reimbursement against the claim proceeds for the scheme.
Community / environment
By regulating excessive profit making by third-party litigation funders and lawyers,
contrary to the fundamental purpose of the class action regime, this proposal would
enhance community confidence in the legal system.
This approach could also impact the broader community or environment by
introducing uncertainty in the litigation funding market. This uncertainty could
possibly arise from court powers being inconsistently exercised across cases or other
unintended market responses to the change. In turn, this could reduce funding appetite
and plaintiffs' ability to seek redress through the class action system.
However, if this risk manifests, it is likely to be temporary, as the market adjusts to the
additional regulation. For example, the uncertainty caused by inconsistent judicial
decisions is likely to diminish as case law regarding the provisions evolves. Similarly,
a reduction in the funding activity of existing litigation funders may prompt the entry
of new funders and is not inappropriate when caused by an inability to make windfall
profits.
Relevantly, the ALRC referred to a submission by Maurice Blackburn which
acknowledged a discrete statutory power to vary, amend or reject litigation funding
agreements 'may introduce a degree of uncertainty and timidity in the litigation
funding market'. However, it noted Maurice Blackburn's suggestion the impact would
be temporary, as the 'practical application of this type of provision evolves and
principles become settled.'
Government
This element of the proposal would create a statutory power for any court exercising
federal jurisdiction to approve a litigation funding agreement. It also:
• would enhance court oversight over litigation funders and funding agreements
• would clarify and settle conflicting case law on the power of the court to
intervene in litigation funding agreements
33
Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
• would promote appropriate use of judicial resources in assessing the claim
proceeds distribution method by providing relevant factors for consideration
• would address judicial calls for guidance on assessing litigation funding
agreements in Liverpool City Council v McGraw-Hill Financial, Inc (now known
as S & P Global Inc) [2018] FCA 1289
• would enhance the court's protective jurisdiction in class action proceedings,
especially when combined with the proposal to require members of a class action
litigation funding scheme to provide written consent to enter the scheme
• may prevent the court from considering other factors in determining a fair and
reasonable distribution of class action proceeds between a funder and members
of a class action litigation funding scheme
• may increase the time and resources expended by the court on approving
settlements and awarding judgments in a class action.
Reasons for recommending this proposal
This proposal presents a flexible, fit-for-purpose approach to regulating windfall
returns to funders in the class action litigation funding industry. In particular, the
approach:
• recognises the need for courts to be able to adjust the distribution of class action
returns for the circumstances of a particular case
• ensures fair and reasonable returns to class members within existing frameworks
of the court's protective jurisdiction towards class members
• minimises interference in private contractual relationships between funders and
plaintiffs.
This proposal reflects submissions to the ALRC inquiry and feedback from the
Government's two consultations. The ALRC noted the majority of stakeholders who
submitted to its inquiry favoured a statutory basis for the court's power to reject, vary
or set the commission rate in litigation funding agreements. However, in arriving at
recommendation 14, the ALRC agreed with the Australian Bar Association that the
commission rate was not the only 'contractual integer' that determined the funder's
contractual entitlement, and that the Court's power to reject or vary the funding
agreement should be extended to other terms relevant to the calculation of the funder's
entitlement to payments.
In feedback to the Government's June 2021 consultation, stakeholders from across the
class action industry expressed support for a Federal Court power to approve, reject,
vary and amend the terms of litigation funding agreements as recommended by the PJC
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Supplementary regulatory impact analysis
and ALRC rather than an inflexible guaranteed minimum return to class members. This
included industry groups, law firms and legal associations, and litigation funders.
Stakeholder feedback on the specific court approval mechanism in the policy proposal
was mixed. Some stakeholders, including litigation funders and class action law firms,
objected to the requirement for court approval and intervention, the 'fair and
reasonable' test and exhaustive factors for court consideration in determining whether
a proposed distribution method is fair and reasonable. Other stakeholders, including
some funders and class action law firms, supported legislative reform to enable courts
to approve or vary the claim proceeds distribution method. Business stakeholders also
favoured reform to provide guidance to the court in evaluating a claim proceeds
distribution method.
On balance, the Government considered the proposal strikes an appropriate balance
between maintaining flexibility in individual cases while ensuring a fair and reasonable
distribution of class action proceeds.
3. Introducing a rebuttable presumption about the
distribution of claim proceeds to cover costs
This element of the proposal was not included in the PJC or ALRC reports. However,
recommendation 20 of the PJC report contemplated a form of direct price regulation to
address identified 'systemic and inappropriate skewing of the proceeds of a successful
class action in favour of litigation funders at the expense of class members'.
This element is intended to supplement the element discussed at section • 2 above. It is
operationalised when a court considers whether a proposed claim proceeds distribution
method is fair and reasonable. In these cases, the court would be guided by a rebuttable
presumption that a distribution of over 30 per cent (in aggregate) of the claim proceeds
to entities who are not scheme members is not fair and reasonable.
This approach is less interventionist than a fixed cap on returns as contemplated by
recommendation 20 of the PJC report. It signals the Government's policy objective that
plaintiffs in a class action should receive a fair and reasonable return but maintains
flexibility for the court to adjust the distribution of class action proceeds to reflect the
circumstances of the case. This flexibility also addresses the inability of a fixed cap
approach to eliminate windfall profits in cases with very high judgment awards or
settlement amounts, and the potential impact of such an approach on funding of smaller
or more complex matters.
Benefits and costs
Class members
This element would give rise to a range of benefits to the members of a class action
litigation funding scheme including:
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
• protection against windfall profit making and disproportionate returns to
litigation funders identified by the ALRC and PJC
• assurance that they will receive a court-assessed fair and reasonable share of their
claim proceeds in the proceeding.
Under a fixed cap approach to returns, the cap may also become a floor if it
incentivises funders and lawyers to charge costs of 30 per cent of the claim proceeds,
even when a lower portion is warranted. This is less likely to occur with a rebuttable
presumption approach. Further, the risk is mitigated by the proposed court power to
adjust the claim proceeds distribution method after considering factors such as the
funder's return on its actual costs (as discussed in section • 2 above) to ensure a fair and
reasonable distribution to the scheme's members.
Litigation funders
With respect to litigation funders, this element of the proposal:
• would prevent funders from extracting unfair returns from the scheme proceeds
and so reduce instances of windfall profit making
• may increase uncertainty to funders about their expected returns in a class action,
but this uncertainty is likely to abate over time as a body of precedent is
developed
• may reduce funding appetite until the increased uncertainty is abated, particularly
for matters where the likely cost of proceedings is large relative to the likely
proceeds
• may incentivise funders to adopt strategies on cases to ensure a minimum
commercial return within the confines of the regime, which may not be in class
members' best interests (although this risk is mitigated by the court's power to
review the fairness and reasonableness of the proposed distribution of claim
proceeds to non-members)
• may increase compliance costs as funders change their behaviour and
arrangements to comply with the new regime.
Community / environment
The impact of this element on the community and environment is as discussed in
section • 2 above. It would also promote greater certainty in the market about the
distribution of proceeds in class actions.
In addition to these factors, some stakeholders responding to the Government's
September 2021 consultation on the policy proposal suggested a rebuttable
presumption could encourage strategic responses by defendants to 'run up' the costs of
36
Supplementary regulatory impact analysis
a proceeding by engineering delays and commencing unnecessary interlocutory
processes. Finally, some stakeholders noted these and other practices could make
settlement of class actions more difficult to achieve.
These risks would be mitigated by the flexibility available to the court to find the
presumption has been rebutted, including by reference to the complexity and duration
of the proceedings and the reasonable legal costs incurred by or on behalf of scheme
members.
Government
This element of the proposal would:
• provide guidance to the court as it exercises its powers to approve or vary the
claim proceeds distribution method in funding agreements
• promote appropriate use of judicial resources in assessing the claim proceeds
distribution method
• reduce time and resources expended by the court on approving settlements and
awarding judgments in a class action once a body of case law has developed
around the new regime
• provide clarity about the Government's policy position that class action plaintiffs
should receive a fair and reasonable return of class action proceeds.
Reasons for recommending this proposal
The PJC's report favoured a mechanism to regulate litigation funding commissions to
address systemic and inappropriate profits by litigation funders at the expense of class
members. Of the options considered by the PJC and Government, this proposal
presents the most flexible approach. It promotes certainty and provides guidance on the
Government's expectation of fair and reasonable returns to class members, while
recognising the critical role of the courts in tailoring the distribution of claim proceeds
in individual cases.
The recommended approach reflects submissions to the PJC inquiry and feedback from
the Government's two consultations. The PJC considered a range of options to address
this concern. Among its recommendations was recommendation 20 to consult on
various design elements of a guaranteed statutory minimum return of gross class action
proceeds to class members including a proposed minimum return of 70 per cent.
The Government undertook consultation in line with recommendation 20 in June 2021.
Most stakeholders opposed a guaranteed statutory minimum return to class members.
Further, of those stakeholders who supported a minimum return, most favoured
appropriate flexibility to amend the minimum return in particular cases or as part of a
graduated approach overseen by courts. Several stakeholders suggested a rebuttable
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
presumption (or a statutory minimum return which could be amended) which would
enable courts to find the presumption had been rebutted where justified.
In response to this feedback, the Government consulted on a specific design of an
alternative option in September 2021, being a rebuttable presumption that a return to
the members of a class action litigation funding scheme of less than 70 per cent of their
gross proceeds in the proceeding is not fair and reasonable. Some stakeholders
considered the design created uncertainty about whether the method captured the
distribution of proceeds among members of the scheme (rather than between members
as a whole and litigation funders). Accordingly, the Government refined the design of
the presumption to frame it in terms of the overall proportion of claim proceeds which
would be distributed outside the scheme's membership. This design promotes greater
certainty by ensuring all relevant costs are captured by the presumption.
4. Requiring consideration of fee assessor and contradictor
advice and payment of costs
The proposed reform varies PJC recommendations 13 and 18, by mandating that where
the court has referred the funding agreement to a litigation fee assessor for inquiry into
the funder's remuneration, the court must receive and consider the assessor's report in
deciding to approve or vary the claim proceeds distribution method unless it is not in
the interests of justice. Ordinarily, a court would already consider the report of a
referee or contradictor where one has been assigned. For example, section 54A of the
Federal Court Act 1976 states that the Federal Court may deal with reports as it thinks
fit, including adopting, varying, rejecting the report or making such orders as the court
sees fit.
Similarly, the proposed reform mandates that where the court has appointed a
contradictor to represent the scheme's members, the court must consider the
contradictor's representations in deciding to approve or vary the claim proceeds
distribution method unless it is not in the interests of justice to do so. As above,
considering the views of a contradictor where one is appointed would ordinarily
already occur within the courts.4
This proposal also varies the implementation of PJC recommendations 16 and 18 to
require the constitution of a class action litigation funding scheme to provide that under
each funding agreement, litigation funders are to cover all reasonable costs of a referee
or contradictor appointed by the court, unless the court orders otherwise. Conversely,
recommendations 16 and 18 are that the litigation funder be required to meet these
costs in circumstances where the conduct of the funder justifies such an order being
made.
4
Parliamentary Joint Committee on Corporations and Financial Services, Litigation Funding
and the regulation of the class action industry, Final Report, December 2020, Chapter 12
Parliamentary Joint Committee on Corporations and Financial Services, Litigation Funding
and the regulation of the class action industry, Final Report, December 2020, Chapter 12.
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Supplementary regulatory impact analysis
Reasons for recommending this proposal
These reforms make it clear that a court must turn its mind to referee reports and the
representations of contradictors in assessing the claim proceeds distribution method.
This ensures that courts consider the appropriate information in determining whether to
approve or vary the distribution of claim proceeds in a litigation funding agreement.
However, while these reforms go beyond, and are more prescriptive than the PJC
recommendations, they retain court discretion if considering the contradictor's
representations or the referee's report is not in the interests of justice. Retaining court
discretion in appointing a contradictor or referee but mandating the court consider any
report provided was supported by a number of submissions received during the
Government's consultation in September 2021.
The reforms also make clear that the funder is responsible for, and cannot pass on, the
costs of referees and contradictors. The implementation of this approach differs slightly
from the PJC recommendations but aligns with the principle that the funder should
bear responsibility for any processes that assist the court to determine that their
proposed distribution of the claim proceeds of a class action litigation funding scheme
is fair and reasonable. This is consistent with the Government's key objective of
protecting the interests of the class members and ensuring a fair and reasonable
distribution of the claim proceeds of a class action litigation funding scheme.
This proposal additionally does not mark a significant departure from the status quo
that litigation funders would ordinarily cover the costs of a referee or contradictor as
part of their commitment to cover the costs of litigation.
During the Government's consultation on the policy proposal in September 2021,
stakeholders raised that mandating litigation funders pay the costs of any fee assessor
and contradictor would result in these costs being passed on to group members. The
proposed policy package provides protection against this scenario by:
• ensuring the court retains discretion in appointing a referee or contradictor
• establishing the rebuttable presumption considered at section 3 above
• including a provision so that a funder is barred from recovering these costs from
the claim proceeds of the class action litigation funding scheme.
5. Extending the jurisdictional impact of some
recommendations
Several reforms in this proposal go beyond PJC recommendations 7, 11, 12, 13, 16, 18
and ALRC recommendation 14 in that they extend the application of the recommended
reform beyond the Federal Court to all state and territory courts exercising federal or
state/territory jurisdiction. This element of the proposal seeks to maximise protection
for class members across Australia. The reform package adopts an expansive approach
seeking to extend regulation to litigation funding agreements for class actions in any
Australian court.
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
This avoids the risk of 'forum shopping' by funders filing in courts which do not have
the same level of protection for class members. This implementation approach also
achieves national consistency across class action regimes, something multiple
stakeholders have argued for and a key recommendation of the PJC (see
recommendation 31).
6. Addressing conflicts of interest involving plaintiffs'
lawyers and funders
This element of the proposal represents an extension of recommendation 26 of the PJC
report and recommendation 21 of the ALRC report. In considering the circumstances
arising in the class action against Banksia Securities Limited (Banksia) brought on
behalf of Banksia debenture holders, the ALRC and PJC each recommended amending
legal profession conduct rules to prohibit certain legal representatives from having a
financial or other interest in a third-party litigation funder that is funding the same
matter on which they are acting.
Neither the PJC nor the ALRC recommended corresponding prohibitions on third-party
litigation funders in respect of the same conduct. This element of the policy proposal
addresses this inconsistency by proposing an amendment to the Corporations
Regulations 2001 (Corporations Regulations) to impose prohibitions and sanctions on
funders. Under this approach, as a condition of the litigation funder's Australian
Financial Services Licence (AFSL):
• the funder must maintain adequate practices for ensuring lawyers providing
services in relation to a class action litigation funding scheme do not have a
material financial interest in the funder
• the lawyers cannot have or obtain a material financial interest in the funder
• if a lawyer providing services in relation to the scheme does have or obtains a
material financial interest in the funder, the funder must ensure the lawyer stops
providing the services or relinquishes the interest.
If a funder breached this condition of licence, the Australian Securities and
Investments Commission (ASIC) could suspend or cancel their licence, preventing
them from offering litigation funding services.
This proposal would also extend protection to plaintiffs of funding regimes that are
exempt from the MIS and AFSL regimes, including insolvency litigation funding
schemes and litigation funding arrangements. Funders for these regimes would be
required to maintain adequate practices for managing conflicts of interest and ensuring
lawyers providing services in relation to the exempt regime do not have or obtain a
material financial interest in the funder.
The amendments also recognise that the material financial interests may be held by
close associates of the lawyer.
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Supplementary regulatory impact analysis
Benefits and costs
Class members
This proposal would give class action plaintiffs stronger protection against conflicts
involving financial interests between plaintiffs' legal representatives and funders, who
have significant control over the carriage of their class action.
It could give rise to potential disruption or delay in some cases if it is necessary to find
new solicitors, counsel or funders in compliance with the provision. However, the
probability of this risk is very low, as case law already indicates court opposition to
lawyers having a financial interest in a case on which the lawyer is engaged.
Accordingly, it is likely lawyers are already conscious of the need to separate their
financial interests from the funder in any given case as is appropriate. Further, the
benefits of addressing identified non-compliance and misconduct outweighs the harm
to a litigant associated with any temporary delay to instruct new, non-conflicted legal
representatives.
Members in other funded proceedings
This proposal would give plaintiffs in proceedings involving insolvency litigation
funding schemes and litigation funding arrangements stronger protection against
conflicts of interest involving financial interests between their legal representatives and
funders.
Litigation funders and legal representatives
This proposal would have the following impacts on litigation funders and legal
representatives:
• loss of income from financial interests which were relinquished under the
regulation
• increased compliance costs, including for establishing practices to prevent the
conduct covered by the regulation.
However, in light of the Supreme Court of Victoria's clear decision that the
circumstances in the Banksia class action gave rise to an unacceptable conflict of
interest, it is likely that most law firms, legal practitioners and barristers have already
divested any financial interests (if any) or recused themselves from cases which would
be captured by this proposal. Accordingly, funders are likely already complying with
this proposal.
Further, under section 912A of the Corporations Act, litigation funders are already
required to have in place adequate conflict management arrangements. This
requirement also applies to exempt litigation funding regimes under paragraph
7.6.01AB(2)(a) of the Corporations Regulations.
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
Accordingly, this element of the proposal is likely to have minimal or no additional
regulatory impact on funders and legal representatives. Rather, its effect would be to
assist in the prevention of future misconduct of this nature.
Community / environment
This option would promote greater confidence in the legal system in the community by
establishing regulatory consistency between lawyers and funders in respect of the same
conduct.
Government
With respect to the impact on Government, this option:
• increases the oversight and enforcement tools available to ASIC to regulate
conflicts of interest of the kind arising in the Banksia class action
• may increase the time and resources required by ASIC to oversee and enforce the
relevant regulations.
Reasons for recommending this proposal
This proposal supplements the PJC and ALRC recommendations, which, in isolation,
would not prohibit funders funding actions with conflicted legal representatives,
despite the close relationship between the funder and the legal representative and the
duties they each owe to their common clients.
It also creates regulatory consistency in addressing the policy problem, which would
account for any gaps arising from implementation of the PJC and ALRC
recommendations alone, without corresponding regulation of litigation funders in
respect of the same conduct.
Further, unlike the PJC and ALRC recommendations, this approach does not rely on
professional self-regulation to address the wrongdoing identified in the Banksia case
and provides greater assurance to parties that their funders are acting in their best
interests and are subject to appropriate ASIC oversight. It also provides a mechanism
for timely response to the policy problem in the event the professional legal bodies are
delayed in implementing the recommendation.
As noted above, this proposal is not likely to increase the regulatory burden on
litigation funders and legal representatives but will protect parties to funded
proceedings against future misconduct.
The PJC noted some stakeholders considered the alleged issues and misconduct arising
in the Banksia case warranted regulation of litigation funders under financial services
regulation, which contributed to the PJC's recommendation of a fit-for-purpose MIS
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Supplementary regulatory impact analysis
regime for litigation funders. There was also support for the proposed measure in the
Government's September 2021 consultation.
EVALUATION AND IMPLEMENTATION
The policy proposal will be implemented through legislative changes to the
Corporations Act and the Corporations Regulations. If the legislation is passed and the
reforms commence, the new processes would be subject to ongoing monitoring to
ensure they operate effectively. Treasury and the Attorney-General's Department will
consider options, including post implementation review, following the commencement
of the new processes. The Government will continue to engage with stakeholders to
determine the effectiveness of the reforms.
REGULATORY BURDEN ESTIMATE
This regulatory burden estimate covers the policy settings for the proposed reforms set
out in the policy proposal, including the elements in sections 1 to 7 listed above, to the
extent the expected impacts of the proposal fall within the Regulatory Burden
Measurement framework.
It is estimated the regulatory cost of this proposal is on average between $68,000 and
$95,000 per year (over 10 years), as set out in the table below. Elements of the
proposal which have not been discussed in this section were assessed to have a nil
regulatory impact for the purposes of the Regulatory Burden Measurement framework.
Average annual regulatory costs (from business as usual)
Change in Business Community Individuals Total change
costs Organisations in cost
Total, by $68,000 to Nil Nil $68,000 to
sector $95,000 $95,000
The following assumptions were adopted in developing the regulatory burden estimate
associated with the policy proposal:
• Number of class action litigation funding schemes each year: It is assumed
every third-party funded class action filed after the start of the new regulations
would involve a class action litigation funding scheme. It was estimated 32 class
actions involving third-party litigation funding would be filed each year of the
10 year regulatory burden estimate. This was based on an average of the number
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
of filed class actions involving a litigation funder between 2017/18 and 2020/21
as reported in 2020/21 Review of Class Actions by King & Wood Mallesons,
released on 22 September 2021 (KWM Report).
• Number of litigation funders operating in Australia: It is assumed 33
litigation funders will operate in Australia for each year of the regulatory burden
estimate. This is based on the number of funders listed in the ALRC report,5
which was subsequently referenced by the PJC.6
• Time taken to amend the constitution and funding agreements to comply
with the claim proceeds distribution method requirements: To calculate the
regulatory burden estimate associated with these proposed new requirements, it
was necessary to estimate the time it would take to implement the requirements.
The value of this time was calculated using guidance provided by the Office of
Best Practice Regulation of the standard hourly wage rate for a business.7
- It was assumed each funding agreement was already in writing and
contained a claim proceeds distribution model.
- It was recognised that litigation funders would likely have to undertake
further work to adjust to the reforms and arrange for the relevant
amendments to be made to each scheme constitution and funding
agreement. This could include a range of activities such as assessing the
implications of the changes, drafting new constitutional provisions,
aligning the claim proceeds distribution across the funding agreements
associated with a class action litigation funding scheme, developing
guidance and disclosure for scheme members, liaising with regulators,
seeking legal advice and obtaining approval from scheme members.
- It was assumed that once the requirement had been embedded, less work
would be required for each scheme.
• Impact on courts to operationalise powers to approve and vary the claim
proceeds distribution method and rebuttable presumption: The elements of
the proposal outlined at sections • 2 and 3 may have a regulatory impact on the
administration of courts and tribunals in federal and state jurisdictions.
5
Australian Law Reform Commission, Integrity, Fairness and Efficiency - An Inquiry into
Class Actions Proceedings and Third-Party Litigation Funders, Final Report, December
2018, pp. 65, 81.
6
Parliamentary Joint Committee on Corporations and Financial Services, Litigation Funding
and the regulation of the class action industry, Final Report, December 2020, p. 35.
7
Australian Government, Department of the Prime Minister and Cabinet, Office of the Best
Practice Regulation, Regulatory Burden Measurement Framework Guidance Note, March
2020, p. 11.
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Supplementary regulatory impact analysis
- As noted in sections • 2 and 3 above, some elements of the proposal are
likely to increase regulatory costs on courts and tribunals while others are
likely to provide regulatory efficiencies.
- These impacts have not been quantified for the purposes of this regulatory
burden estimate, as there is no typical, uniform, practicable or reliable
measure to determine the time spent by the court in making the
assessments required under the proposed reforms, or valuing the time spent
in doing so. The circumstances of each case, including its complexity,
makes any estimation of the court's time on it highly speculative.
- Further, a significant portion of the value of the court's time in complying
with the policy proposal is inextricably linked to the opportunity cost of
those court resources not being allocated to other matters. Opportunity
costs are excluded from the Regulatory Burden Measurement framework.
• Time taken to adjust financial models in compliance with the rebuttable
presumption: It is assumed that litigation funders will experience a regulatory
burden to assess and revaluate financial models and business operations in the
first year of the reforms.
- The financial models are likely to rely on commercially sensitive, non-
public information, including the funder's risk appetite and target return on
invested capital. Further, stakeholder submissions have indicated litigation
funders approach the funding of cases on a portfolio basis.
- In these circumstances, and with the limited data available, it is not
practicable to estimate how much time and other compliance costs would
be required to adjust commercial models to accommodate the rebuttable
presumption. Accordingly, no estimate has been made with respect to this
element of the proposal.
• Time taken to seek to test the rebuttable presumption: It is assumed that in
the first year of the proposed reforms, parties in some funded cases will seek to
test the rebuttable presumption with the court, and therefore spend time over and
above the time spent on the ordinary conduct of the case, to develop submissions
in favour of overturning the presumption.
- Analysis commissioned by Omni Bridgeway in its submission to the
Government's June 2021 consultation indicated that with a 30 per cent cap
on all costs of a funded proceeding, 36 per cent of funded cases would not
proceed as the cap would not fully cover the legal costs alone.8 It is
8
PwC, Models for the regulation of returns to litigation funders, March 2021, p. 16.
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
assumed that under the proposed rebuttable presumption, the funder would
seek to rebut the presumption in these cases.
- It is further assumed the regulatory cost of seeking to rebut the
presumption will diminish over time, as a body of case law develops and
principles are established for when the presumption will be rebutted. As
such, the presumption will be tested in fewer cases over time.
- However, there is no consistent, reliable method for determining the time it
would take to prepare for, and ultimately make submissions to rebut the
presumption in any given case. This would rely heavily on the proceedings,
any relevant precedent on which the court may rely, and the unique
circumstances of the case. Accordingly, no costing has been provided for
this measure.
• Time taken to comply with the conflicts of interest provision: As discussed in
section • 6 above, it is assumed normally efficient litigation funders and lawyers
are already managing conflicts of the type contemplated by the policy proposal
as part of their normal business practice, particularly given the recent decisions in
the Banksia class action and the requirements in section 912A of the
Corporations Act and paragraph 7.6.01AB(2)(a) of the Corporations Regulations.
Accordingly, it is assumed there is no additional regulatory impact associated
with this measure. Further, any such burden would be excluded from the
calculation of regulatory burden pursuant to the Regulatory Burden Measurement
framework.
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Supplementary regulatory impact analysis
APPENDIX
PJC recommendations
• Recommendation 7: the Australian Government legislate to address uncertainty
in relation to common fund orders, in accordance with the High Court's decision
in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall
[2019] HCA 45
• Recommendation 11: Part IVA of the Federal Court of Australia Act 1976 be
amended to introduce:
- a requirement for a litigation funding agreement to obtain approval of the
Federal Court of Australia to be enforceable; and
- a power for the Federal Court of Australia to reject, vary or amend the
terms of any litigation funding agreement when the interests of justice
require.
• Recommendation 12: Part IVA of the Federal Court of Australia Act 1976 be
amended to require that any litigation funding agreement in a class action in the
Federal Court of Australia is governed by Australian law and the Federal Court
of Australia approves a litigation funding agreement only if the agreement
provides that the litigation funder submit irrevocably to the jurisdiction of the
Federal Court of Australia.
• Recommendation 13: the Australian Government amend the Federal Court of
Australia's Class Actions Practice Note to the effect that, pursuant to section 54A
of the Federal Court of Australia Act 1976, at any point in a proceeding, the
Federal Court of Australia may appoint a referee to act as a litigation funding
fees assessor.
• Recommendation 16: the Federal Court of Australia's Class Actions Practice
Note state the Federal Court of Australia may order the costs of the work
undertaken by a referee appointed by the Federal Court of Australia as a
litigation funding fees assessor be paid by a litigation funder, in circumstances
where the conduct of a litigation funder justifies such an order being made.
• Recommendation 18 (partial): the Federal Court of Australia's Class Actions
Practice Note be amended to:
- introduce a presumption that the Federal Court of Australia is to appoint a
contradictor in instances where there is the potential for significant
conflicts of interest to arise, or complex issues are likely to arise at the
settlement approval application;
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Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021
- ensure the Federal Court of Australia may order the costs arising from the
work undertaken by a contradictor be paid by the plaintiff law firm, or the
litigation funder, in circumstances where the conduct on the part of the
lawyer or the litigation funder justifies such an order being made.
• Recommendation 20: the Australian Government consult on:
- the best way to guarantee a statutory minimum return of the gross proceeds
of a class action (including settlements);
- whether a minimum gross return of 70 per cent to class members, as
endorsed by some class action law firms and litigation funders, is the most
appropriate floor; and
- whether a graduated approach taking into consideration the risk,
complexity, length and likely proceeds of the case is appropriate to ensure
even higher returns are guaranteed for class members in more
straightforward cases.
ALRC recommendations
• Recommendation 3: Part IVA of the Federal Court of Australia Act 1976 (Cth)
should be amended to provide the Court with an express statutory power to make
common fund orders on the application of the plaintiff or the Court's own motion
• Recommendation 14: Part IVA of the Federal Court of Australia Act 1976
(Cth) should be amended to provide that:
- third-party litigation funding agreements with respect to representative
proceedings are enforceable only with the approval of the Court;
- the Court has an express statutory power to reject, vary, or amend the terms
of such third-party litigation funding agreements;
- third-party litigation funding agreements with respect to representative
proceedings must provide expressly for a complete indemnity in favour of
the representative plaintiff against an adverse costs order; and
- Australian law governs any such third-party litigation funding agreement
the funder submits irrevocably to the jurisdiction of the Court.
Recommendation 21: The Australian Solicitors' Conduct Rules should be amended to
prohibit solicitors and law firms from having financial and other interests in a third-
party litigation funder that is funding the same matter in which the solicitor or law firm
is acting.
48