Love 'em or loathe 'em, professional litigation funders
are here to stay.
That being the case, the obvious question is whether –
and how – they should be regulated.
This is a problem with which the Government appears to be
struggling, if recent events are any guide.
It is now five years since the High Court said that litigation
funding did not breach any existing prohibitions (in Campbells v
Fostif); it's also five years since the Standing Committee of
Attorneys-General began talking about how the industry should be
The absence of any resulting legislation has produced a policy
vacuum which has now sucked in both ASIC and the courts.
Two landmark court decisions held that litigation funding
arrangements for class actions constituted "managed investment
schemes" and subject to the financial services licensing
provisions of the Corporations Act.
ASIC respondedby giving funders temporary exemptions from the
managed investment and licensing requirements.
For its part, the Federal Government announced an intention to
permanently exclude funded class actions from the managed
investment and licensing requirements. These exemptions would be
conditional on appropriate arrangements being put in place to
manage conflicts of interest.
Since then, ASIC has rolled over its stop-gap orders a number of
times – most recently, on 30 September, until 29
February, to allow the Government to arrive at a final policy
ASIC presumably granted the latest rollover because this is
still some way off. Just how difficult could it be to work out a
permanent regulatory system for litigation funders?
Judging by the fact that they have been operating in Australia
for at least 15 years, and the current debate has been running for
five years, very difficult, apparently.
To understand why, it's necessary to look again at the
opening sentence. It is no exaggeration to say that litigation
funding inspires love and loathing in almost equal measures.
The High Court may have given litigation funders the green light
(in the Fostif case) but many judges continue to have strong
reservations. Earlier this year, Federal Court Chief Justice
Patrick Keane joined the list of concerned judges, in a long
interview with The Australian Financial Review. His concerns
mirrored earlier criticisms by both judicial and lay critics
– particularly in regard to claims of excessive fees and
a proliferation of unmeritorious claims.
There are, of course, two sides to the story. The group which
has, perhaps, benefited most from litigation funding is creditors
of failed companies. Before litigation funding, a lack of funds
often prevented liquidators from pursuing those responsible for the
collapse of a company and recovering damages.
Other beneficiaries are claimed to include small investors who
lack the individual resources to pursue breaches of corporate law.
In a country of small shareholders, such as Australia, that is a
potentially large group whose perceived interests no Government
would lightly tamper with: the long-drawn-out policy response to
the Sons of Gwalia case clearly illustrates that fact.
This was first published in the the Australian Financial
Review on 14 October 2011
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
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