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Focus: Clarification of class action funding

5 May 2010

In brief: In response to a recent Federal Court decision that funded class actions were managed investment schemes as defined in the Corporations Act 2001, the Minister for Corporate Law, Chris Bowen MP, announced yesterday that the Federal Government is drafting regulations to clarify that funded class actions and similar arrangements are not managed investment schemes. Partner Alex Cuthbertson (view CV) and Senior Associate Kylie Virtue report.

How does it affect you?

  • As foreshadowed in our Focus: A cross for litigation funding, the Brookfield1 decision would have resulted in litigation funders being forced to register class actions with the Australian Securities or Investments Commission (ASIC), or to obtain appropriate exemptions.
  • As a result, ASIC invoked a transitional relief regime until 30 June 2010 while the Government consulted on how funded class actions should be regulated in future.
  • There is very little detail at this stage as to what the regulations will look like, but the Minister's announcement suggests that they will attempt to address the need to manage potential conflicts of interest.
  • However, despite calls for broader regulation of litigation funders, the Minister appears to have signalled that the Government will not at this stage go much beyond merely restoring the status quo pre-Brookfield.

Background

Following the Brookfield decision, ASIC announced on 4 November 20092 that it would provide transitional relief until 30 June 2010 from the requirements that would otherwise apply to funded class actions as 'managed investment schemes' under Chapter 5C and Chapter 7 of the Corporations Act 2001 to allow ongoing class actions to continue. These requirements include:

  • appointing an AFS licensed public company as 'responsible entity' to operate the scheme;
  • adopting a complying constitution and compliance plan for the scheme;
  • registering the scheme with ASIC;
  • preparing a Product Disclosure Statement for the scheme; and
  • providing ongoing disclosure to members of the scheme.

ASIC indicated that relief would generally be granted, on individual application, to lawyers and litigation funders involved in the conduct of class actions that were commenced before 4 November 2009. This was designed to avoid disruptions that could adversely impact plaintiffs in those actions, or interfere with the timely and efficient conduct of the subject litigation.

However, any class actions commenced after 4 November 2009 have been assessed separately by ASIC, on a case-by-case basis. In at least one case, a proposed shareholder class action to be funded by litigation funder IMF against Transpacific Industries Group, ASIC declined to grant relief. As a result, IMF announced on 8 March that the action would proceed on behalf of 'sophisticated and professional' (non-retail) investors only. The impact of the Government's announcement has been immediate, with IMF announcing today its intention to fund these claims on behalf of retail investors as well.

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The way forward

Yesterday's announcement stated that absent evidence that consumer rights are being breached under the current class actions regulatory framework or that consumers are suffering detriment as a result of participating in class actions, the Government has resolved that imposing a significant regulatory burden cannot be justified.

Nevertheless, as a result of the Government's consultation with key stakeholders including legal practitioners, litigation funders, consumer representatives, regulators and other Departments, it recognises there will be situations in which conflicts of interest may arise, 'such as where the class action lawyer and funder are assessing proposed awards or settlements'.

Therefore, it appears that the regulations will at least be designed to ensure that appropriate arrangements are in place 'to protect consumers and ensure that their interests are paramount.'

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Timing

Given that the regulations will not be required to pass through Parliament, the Government seems intent on fast-tracking the process to be in place before ASIC's temporary exemption expires on 30 June 2010.

It remains to be seen whether the resulting regulations will indeed strike the right balance between protection of consumers, proper management of potential conflicts of interest, and the avoidance of excessive compliance burden on funders of class actions and class action lawyers.

(Chris Bowen's Press Release.)

Footnotes
  1. Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147.
  2. See announcement on 4 November 2009:

For further information, please contact:

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