06 Jun 2013
ASIC issues litigation funding guidance
by Ross McInnes
Recognising the impact that funders have on the legal landscape in Australia, should we be content with ASIC's light touch regulatory approach in Regulatory Guide 248?
With the expansion of litigation funding driving an increase in class actions being pursued against corporates across Australia, questions have arisen about how best to manage the inevitable conflicts of interest.
ASIC has recently released Regulatory Guide 248: Litigation schemes and proof of debt schemes: Managing conflicts of interest.
Conflicts of interest
Everyone accepts the potential for conflicts to arise where litigation funders are involved in litigation. ASIC Commissioner John Price has referred to this as an "inherent tension":
"A key factor in the increase in class action filings has been the emergence of commercial litigation funding. But there is also an inherent tension in these types of schemes between the interests of the funders liquidators, lawyers and participating members."
In an effort to manage those conflicts, in 2012 the Government passed the Corporations Amendment Regulation 2012 (No. 6). The effect of that regulation is that a person providing financial services for litigation schemes and proof of debt schemes is exempt from the requirements that would otherwise apply under Ch 7 of the Corporations Act 2001 provided that person maintains adequate practices from managing any conflicts of interest that may arise.
ASIC Regulatory Guide 248
ASIC's Regulatory Guide puts some meat on the regulatory bones. It sets out ASIC's expectations for compliance with the obligation to maintain adequate conflict procedures.
The guide sets out the regulators expectations for compliance with the obligation to maintain adequate practices to manage conflicts of interest. The Guide warns:
"While you must take responsibility for determining your own approach to managing interests that conflict, in our view, if your arrangements are not consistent with the guidance and expectations in this guide, you are less likely to be complying with the obligation and will be exposed to a greater risk of regulatory action". [RG 248.22]
Key Aspects of the Guide
The Guide is broken into five chapters, the key elements being:
- Overview: While a person providing financial services for litigation schemes is exempt from the requirements of Chapter 7 of the Corporations Act 2001, the person must maintain adequate processes for managing any conflicts.
- Written procedures: Funders must conduct a review of their business operations that relate to the litigation scheme or proof of debt scheme to identify and assess potential conflicting interests. Funders must then have written procedures for identifying and managing conflicts which include procedures about protecting the interests of members and prospective members. These procedures must be regularly reviewed at intervals of not less 12 months and must be monitored and managed by senior management or partners.
- Disclosure: Funders must have written procedures dealing with how to effectively disclose conflicts of interest to members and prospective members of the litigation scheme or proof of debt scheme.
- Managing situations: ASIC expects the written procedures will address issues including recruitment of prospective members and that there will be arrangements to ensure that conflicts do not result in misleading or deceptive conduct. The terms of the funding arrangements should comply with unfair contracts and unconscionability legislation. In addition, the written procedures must include procedures about dealing with situations in which lawyer acts for both the funder and members.
- Settlement offers: Procedures must be in place to manage conflicts of interest when settlement offers are made and considered. If a litigation scheme settles without a proceeding being issued, the terms of any settlement agreement should be approved by counsel.
The Guide identifies pre-existing conflicts of interest and the need for written procedures to deal with situations in which there is a pre-existing relationship between any of the funder, lawyer and members. The following specific example is given where:
"For example, the lawyers may also own, or be officers of, the funder." [RG 248.13]
This very question will play out before the Full Federal Court when it considers the implications of plaintiff firm Maurice Blackburn's and its principals' financial ties to a new litigation funder (Claims Funding Australia). The firm is proposing to use the funder for its class action against the Commonwealth over the equine flu outbreak in 2007.
Many class actions would not be pursued if not for litigation funding. The light-touch regulation of the industry now has a framework and funders will need to adhere to ASIC's expectations.
The burning question remains: is this enough? The relationships between lawyers, funders and claimants is complex. Steps have been taken to manage conflicts that arise but questions remain about whether the regulations do enough to ensure that conflicts don’t arise in the first place. What will happen if a funder fails to comply with ASIC's guidance – will regulatory action be taken?
A related issue is that to date, litigation funders remain free from prudential controls. While this may not be a concern for the large well established and experiences funders, there is an increasing number of smaller overseas players entering our market.
Recognising the impact that funders have on the legal landscape in Australia, should we be content with this light-touch regulatory approach?
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