14 Oct 2011

Litigation funding in policy vacuum

by Jennifer Ball

There's a policy vacuum in the regulation of litigation funders.

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 a guide.

It is five years since the High Court said litigation funding did not breach any existing prohibitions, in a case called Campbells v Fostif.

It is also five years since the Standing Committee of Attorneys-General began talking about how the industry should be regulated.

The absence of any resulting legislation has produced a policy vacuum that has drawn in the Australian Securities and Investments Commission and the courts.

Two landmark court decisions held that litigation funding arrangements for class actions constituted “managed investment schemes" and were subject to the financial services licensing provisions of the Corporations Act.

ASIC responded by 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 September 30, until February 29, to allow the Government to arrive at a final policy solution.

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 an interview in The Australian Financial Review. His concerns mirrored criticisms by judicial and lay critics, particularly in regard to claims of excessive fees and proliferation of unmeritorious claims.

There are, of course, two sides to the story.

The group that 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 article was first published in the Australian Financial Review, October 14 2011


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