ASIC provides relief for litigation funders at the dawn of a new era

By Matt Daley, Vanessa Pallone, Nick Killalea and Zach Burridge
03 Sep 2020
The changes remain consistent with the overall objectives of the Government for greater transparency for class action group members and greater accountability for funders.

Following the surprise announcement in May of this year that litigation funders would be required to hold an Australian financial services licence (AFSL) and comply with the managed investment scheme (MIS) regime, the Government wasted little time when it published the Corporations Amendment (Litigation Funding) Regulations 2020 on 23 July 2020.

Consistent with the Government's initial announcement in May, those Amending Regulations came into effect three months from the date of the initial announcement on 22 August 2020. In order to limit potential disruption to existing contractual arrangements and litigation proceedings, the Amending Regulations do not apply in relation to schemes or arrangements entered into before 22 August 2020.

Class action litigation funding schemes are generally understood to fall within the general definition of an MIS in section 9 of the Corporations Act 2001 (see Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643). Previously however, the Corporations Regulations 2001 made litigation funding schemes exempt from the definition of an MIS. Meanwhile financial services and products in relation to such schemes were exempt from AFSL requirements, anti-hawking provisions and the application of Part 7.9 of the Act, which deals with disclosure obligations relating to financial products.

The Amending Regulations remove these exemptions that apply to a "litigation funding scheme", as defined in Regulation 7.1.04N(3) of the Regulations, which generally speaking, involves an entity that is not a party to the litigation (a third party litigation funder) paying the costs of litigation or indemnifying parties from adverse costs orders in return for a percentage share of the proceeds if the litigation is successful. The Amending Regulations do not however remove the effect of other exemptions, which will remain in place for litigation funding schemes involved in insolvency litigation and litigation funding arrangements used in actions involving a single plaintiff.

The Amending Regulations now mean that:

  • class action litigation funding schemes must now register as managed investment schemes, under Chapter 5C of the Act (where those schemes otherwise meet the registration requirements), and will need to be operated by a responsible entity (which is an entity which must, amongst other things, hold an appropriate AFSL and be a public company). A registered MIS is required to have a constitution, a compliance plan and a compliance plan auditor (which are designed to ensure the scheme is operated transparently and in the interests of members of the scheme);
  • funders will generally need to obtain an AFSL in order to deal in, or provide financial product advice in relation to, an interest in a litigation funding scheme because such an interest is a "financial product". As the holder of an AFSL, funders will also need to comply with the general AFSL obligations, such as the obligations to act honestly, efficiently and fairly and to maintain an appropriate level of competence;
  • funders will also be subject to the anti-hawking provisions (which regulate how members may be contacted in relation to an interest in a litigation funding scheme, which includes for example, phone calls to be made during certain hours and members to be offered the opportunity to be on a "No Contact/No Call" register) and
  • a Product Disclosure Statement (PDS) will need to be provided to general members. A general member is defined in Regulation 7.1.04N(4) of the Regulations as a member of a scheme that is not the funder or the lawyer providing services for the purposes of the scheme. The issue of a PDS is intended to mitigate the risk that a member is unaware of the potential risks of becoming a member of a litigation funding scheme, such as facing an adverse cost order if the class action fails and the funder does not hold enough capital to meet that order.

ASIC relief

Coinciding with the commencement of the Amending Regulations, ASIC has issued ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 to support the transition to the new regulatory framework for funders. The Instrument also commenced on 22 August 2020.

The Instrument provides relief from:

  • the obligation to give a PDS to passive members of open litigation funding schemes provided the PDS is available on the scheme operator’s website. However a funder must take all reasonable steps to ensure that any notice to members or prospective members and any advertising material in relation to the class action litigation funding scheme contains a prominent reference to the PDS. A passive member is a general member of an open class litigation funding scheme that has not taken sufficient positive steps to participate in the representative proceedings;
  • the use of application forms for passive members;
  • the obligation to regularly value scheme property, given the uncertainty a funder may face in valuing funded matters;
  • the statutory withdrawal procedures for members of an MIS under the Act if a general member chooses to opt-out of the representative proceedings in accordance with the court rules or any order of the court, or the general member otherwise ceases to have an interest in the outcome of the proceedings; and
  • certain content requirements for a PDS, including a Fees and Costs Template, an example of annual fees and costs, and the boxed Consumer Advisory Warning.

It is also worthwhile noting that whilst responsible entities of registered MISs have certain obligations in Part 2C of the Act (with respect to setting up and maintaining a register of members, including for example, maintaining the name and address of each member), ASIC has also issued a no-action position in relation to maintaining a register of members of a litigation funding scheme.

Applications for relief will be on a case by case basis and must be set out in writing, addressing the regulatory requirements set out in Regulatory Guide 51: Applications for relief.

Given the short period of time between the Government's announcement on 22 May 2020 and the commencement of the Amending Regulations, ASIC's issuing of the Instrument is a sensible response to funders' transitioning to the new regulatory environment, although, despite these concessions, the changes remain consistent with the overall objectives of the Government for greater transparency for class action group members and greater accountability for funders.

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 transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.