Pip Murphy | 22 October 2018

Reform and regulation in Australia - Class actions, contingency fees and legal finance

In June 2017 I reported on two significant legal reviews being undertaken in Australia, one by the Victorian Law Reform Commission (VLRC) and one by the Australian Law Reform Commission (ALRC). These reviews were, in the case of the VLRC, and are in the case of the ALRC, looking at reform and regulation in Australia of class actions, lawyers charging contingency fees, and firms providing legal finance for disputes. The ALRC is also looking at whether company continuous disclosure laws in Australia ought to be reframed.

1. The VLRC Review
After 15 months of referral, consultation and the review of 36 formal submissions, the VLRC report was handed down in March 2018. The key recommendations were:

  1. Regulation of Litigation Funders: The VLRC recommended that there be a national approach to regulation of the industry and greater transparency when a litigation funder is involved in proceedings. The VLRC did not recommend fixed caps or limits on funding commissions, instead noting that this issue required appropriate court control specific to the particular case.
  2. Contingency Fees: The VLRC recommended that lawyers should be allowed to charge contingency fees (but not in personal injury, crime or family law matters) but that this ought to be implemented as a national approach to ensure consistency across the country.
  3. Class Action Regulation: The VLRC recommended that there be an approach taken to strengthen the Supreme Court's powers (it was not tasked with looking at the Federal Court) in class actions, particularly in relation to the review and payment of legal and funding fees. The VLRC did make recommendations intended to improve efficiency and accountability, which it believes should reduce delays and associated costs, but it concluded that the introduction of a pre-commencement certification requirement was not needed. 1

Whilst discussion continues in Victoria following the recommendations contained in the VLRC report, the Australian legal fraternity has now turned its attention to the ALRC review which is currently in the consultation phase.

2. The ALRC Review
Justice Derrington, President of the ALRC and Justice of the Federal Court, released the ALRC Discussion Paper 85 on 31 May 2018. Since this time, the ALRC has:

  1. Received over 70 formal submissions;
  2. Held in excess of 40 pre-Discussion Paper consultations in Australia and 20 post-Discussion Papers consultations in the UK;
  3. Held meetings with the Judicial Expert Panel and Academic Expert Panel; and
  4. Conducted seminars in Sydney, Brisbane and Melbourne. 2

In addition, on 22 and 26 October 2018, Justice Derrington, other Justices of the Federal and Supreme Courts, and some who made formal submissions to the ALRC, will be participating in an inaugural conference hosted by myself and my fellow directors of the Association of Litigation Funders Australia (ALFA). The purpose of the conference is to facilitate a lively discussion, debate and presentation on the latest recommendations put forward by the ALRC. I will talk a little more about the ALFA later in this paper.

The overarching principles of the ALRC review are stated to be:

  1. that citizens should be able to pursue their claims through a process characterised by fairness and efficiency, and one which ensures that the interests of litigants are carried out without undue expense or delay;
  2. that there should be protections in place for litigants involved in the class action system, and that the various funding models available facilitate the pursuit of claims; and
  3. that the integrity of the civil justice system is essential to the operation of the rule of law.3

The recommendations are directed to ensuring that the overarching principles are met. Some of the key matters under consideration are:

  1. Contingency Fees: The introduction of contingency fees has been a longstanding debate in Australia. It is permitted in the UK and the USA to varying extents. The ALRC was proposing to allow class action plaintiff lawyers to charge contingency fees but that this be permitted in limited circumstances. The response that the ALRC received to the proposals was that 71% of submissions supported lifting the prohibition on contingency fees with 29% opposing it. Of those in support, 55% supported the proposed model and 45% disagreed with one or more elements, or suggested variations to the model. 4 This proposal is under consideration again however it is expected, based on the responses received, that the ALRC will permit contingency fees to be charged in Australia on a limited basis. This will be a significant change to the Australian legal industry.
  2. Continuous Disclosure: The ALRC raised a question about whether there needs to be a review of the economic and legal impact of private causes of action in the context of the current law relating to continuous disclosure obligations. This proposal saw an even split of views. Justice Derrington has reported that, for those who prosecute these types of class actions, a review of the continuous disclosure laws was thought unnecessary, and that reform may in fact have unintended consequences. Those who defend securities class actions expressed an urgent need to review the regulatory and class action regimes and their outcomes. The ALRC is still deliberating on this issue.
  3. Funder Regulation: The ALRC is looking at whether, in order to operate in Australia, legal finance professionals should be required to obtain and maintain a licence dealing with, amongst other things, qualifications, experience, capital adequacy, conflicts of interest and dispute resolution processes. The response that the ALRC received to the proposal was that 65% of submissions were broadly supportive of licensing, 15% provided qualified support and 20% opposed it. The revised view of the ALRC, as set out in its post-submission seminar paper, is that, instead of there being a bespoke licence regime for litigation funders, a modified version of the Australian Financial Services Licence (AFSL) be required for litigation funding of class actions; but not where funding is provided for individual clients that are not consumers. In addition, the ALRC looks set to recommend changes to the Federal Court Act 1976 (Cth) (FCA) to require litigation funders to act in a way that is consistent with the overarching purpose of s37M of the FCA, and to expressly provide for cost orders to be made against funders and insurers who fail to comply with the overarching purpose.
  4. Civil Justice Reform: The ALRC is looking closely at the competing class action regime in Australia. The ALRC, after much consultation, is looking at whether the Federal Court of Australia should have exclusive jurisdiction over class actions in Australia. As you would expect, the responses were divided. There are several matters being considered by the ALRC, including but not limited to:
    • Whether all class actions should be initiated as open class actions;
    • Where there are two or more competing class actions, the Court must either consolidate those proceedings or determine which proceeding will progress and stay the competing proceeding(s), unless the Court is satisfied that it would be inefficient or otherwise antithetical to the interests of justice to do so; and
    • Whether there should be a further case management procedure for competing class actions, and that the criteria the Court will apply when determining the lawyer and funder that will have carriage of the class action, be outlined.
  5. The ALRC's final report is due to be handed down on or before 21 December 2018, and the formal consultation and submission process has been swift and directed. Indeed, the process has been fascinating to watch and participate in. It has been a mix of judicial considered views and consultation. It has all the markers of being a robust and carefully considered piece of work when completed. Of course, stakeholders will have differing views on the outcomes, but I do not think anyone will be able to argue that the final recommendations were not the product of extensive due diligence and consideration of all the differing views.

    3. The Association of Litigation Funders Australia (The ALFA)
    The ALFA was formed in 2018. Vannin Capital is a founding member and the author is one of the directors. Vannin Capital is also a founding member of the Association of Litigation Funders in the UK (ALF UK) although the associations are not presently affiliated. The primary objective of ALFA is to facilitate the enhancement of the Australian litigation funding market by:

    1. providing education, training and information concerning litigation funding to its members, the market's stakeholders and to prospective plaintiffs;
    2. actively lobbying the government and legislators, and engaging with other regulators and policy makers to help shape the legal and regulatory framework of litigation funding in Australia; and
    3. promoting best practice and ethical behaviour amongst litigation funders in Australia.

    The ALFA is a professional body which, unlike the ALF UK, does not propose to be directly involved in regulation of participants in the market.

    The ALFA has made submissions to the ALRC on behalf of its members. 6 The submissions represent the collective views of the members of the ALFA, but do not necessarily represent the views of each individual member firm. The submissions made by the ALFA can be summarised as follows:

    1. Contingency Fees: The ALFA does not oppose in principle the introduction of contingency fees but states that if they are to be introduced then there needs to be sufficient safeguards to ensure that solicitors' existing fiduciary duties are not fettered as a result. Further, any capital adequacy requirement or any other regulation that is placed on litigation funders ought also to be placed on law firms charging contingency fees.
    2. Continuous Disclosure: An inquiry into the legal and economic impact of the market protection legislation referred to is not opposed by the ALFA, although the proposed terms of reference are biased and insufficient. A narrowly focused review will skew the results of any review and/or render any resulting recommendations inappropriate. Focus and care is required.
    3. Funder Regulation: The position of the ALFA in its submissions was to question why licensing was in fact required. There does not appear to be any basis founded in evidence, either locally or overseas, to require third-party litigation funders to be licensed. A better approach to licencing, which may have unintended consequences, is to address specific risks that do become apparent by introducing ASIC Regulations such as the RG 248- Managing Conflicts of Interest. These regulations can then be tailored to address a specific risk that has been identified, and they will provide a much more cost effective and efficient mechanism to target litigation funders risks. The ALFA also proposed that, to the extent any capital adequacy requirements are to be implemented, the ALF UK Code of Conduct ought to be considered; but that these requirements be limited to consumer funding and class actions where group members include retail consumers. Vannin Capital is one of the founding members of the ALF UK and, as such, has already voluntarily elected to be bound by a Code of Conduct. The ALF Code of Conduct sets out the standards by which all members of the ALF must abide. Key aspects of the Code of Conduct are:
      • Capital Adequacy - Vannin Capital has agreed to maintain adequate financial resources at all times in order to meet its obligations to fund all of the disputes it has agreed to fund, and to cover aggregate funding liabilities under all of our funding agreements for a minimum of 36 months;
      • Termination and Disputes - Vannin Capital has agreed to behave reasonably and may only withdraw from funding in specific circumstances. Where there is a dispute, including about settlement or termination, a binding opinion is sought from an independent QC; and
      • Control - Vannin Capital is prevented from taking control of the litigation or settlement negotiations and from causing the litigant's lawyers to act in breach of their professional duties. Vannin Capital should be kept informed of the progress of a claim but it does not hold ultimate control over the claim.
    4. Civil Justice Reform: The ALFA supports a flexible approach to the issues around common fund orders and competing class actions. A 'one size fits all' is not appropriate and adopting a prescriptive approach is likely to cause more issues than it resolves.

    We are looking forward to the lively and informative debate that is expected on 22 and 26 October 2018 at the ALFA inaugural conference. It is an interesting time to be involved in the litigation funding industry and we await the final recommendations to be handed down by the ALRC in December 2018. We will of course report on the final recommendations when they are known, and, in the meantime, we will seek to influence the ALRC's final position through our membership of the ALFA.

    1. Access to Justice - Litigation Funding and Group Proceedings Report, March 2018
    2. Inquiry into Class Action Proceedings and Third-Party Litigation Funders POST-SUBMISSIONS SEMINAR paper presented by the ALRC in Brisbane on 6 September 2018.
    3. Inquiry into Class Action Proceedings and Third-Party Litigation Funders POST-SUBMISSIONS SEMINAR paper presented by the ALRC in Brisbane on 6 September 2018.
    4. Ibid
    5. Ibid
    6. The Association of Litigation Funders of Australia Submissions to the Australian Law Reform Commission, August 2018


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