What this means for class action risks in financial services
As anticipated, over the past year there has been a surge in class action filings arising from the evidence given at the Financial Services Royal Commission; and from increased regulatory activity, particularly ASIC's new 'Why not litigate?' stance. In 2019, class actions against the banks, superannuation trustees and insurers fuelled consumer filings to surpass shareholder class actions as the most common form of filing – representing 41% of all class actions commenced, compared with a longer-term average of 23%. The banking and financial services sector remains at high risk.
We expect to see an ongoing stream of claims flowing from the Financial Services Royal Commission, and regulatory investigations and actions continue to unfold. The ability of plaintiff lawyers and litigation funders to use Royal Commission and regulatory materials as a form of 'road map' to identify potential claims is likely to create sustained class action pressure on participants in the banking and financial services sector in the coming years – especially when it comes to consumer-facing issues.
For more information on the current state of the class actions landscape, please see our Class Action Risk 2020.
Before the publication of the Final Report, the matters raised during the Royal Commission resulted in either the commencement or investigation of class actions in relation to:
- Superannuation – regarding alleged breaches of the obligations of a super fund trustee for charging excessive fees and failing to obtain competitive interest rates when investing the cash component of fund members' superannuation;
- Credit card insurance – breaching consumer protection laws and engaging in unconscionable conduct by selling policies to consumers allegedly ineligible to claim under the terms of the insurance;
- Fees for no service – engaging in misleading or deceptive conduct and breaching continuous disclosure obligations through failing to disclose alleged market-sensitive information concerning, among other matters, the practice of charging fees for no service;
- General insurance – making misrepresentations in connection with the sale of insurance, including alleged representations that the scope of coverage under policies was materially broader than provided; and
- Life insurance – allegedly using high-pressure sales tactics to sell direct life insurance products without adequately disclosing the terms of cover, including in relation to exclusions for pre-existing medical conditions or the future cost of policies.
Over the short term, it is anticipated that this initial wave of exposures will expand, as class action promoters (both plaintiff lawyers and litigation funders) digest the Final Report and continue to wade through the significant volume of material that has been made public through the Royal Commission process.
Once these initial filings dissipate, it is expected that a second wave of class actions will be commenced, piggy-backing off increased regulatory enforcement. The filing of class action proceedings in the wake of regulatory activity is a well-trodden path, with admissions and court findings providing a significant leg-up to class action promoters undertaking due diligence and crafting claims. Financial services organisations confronted with regulatory enforcement proceedings that involve potentially large classes of disaffected persons should be alive to this risk and prepare accordingly.
In reaction to the issues laid bare during the Royal Commission and in apprehension of a related deluge of class action filings, insurers have elected to exclude cover in financial lines policies for Royal Commission-related claims. This practice, which first emerged in mid 2018 (during the Royal Commission hearings), is now applied by a number of insurers across the market issuing directors' and officers' coverage.
This is a particularly troubling development for corporates that have been recently burdened with significant premium increases – in many cases, multiples of prior rates of cover, higher deductibles and reduced limits of indemnity.
In these hard market conditions, it is recommended that policyholders:
- shop around when placing or renewing their insurance programmes, obtaining proposals from multiple insurers; and
- seek clarity regarding the scope of cover provided in any policies that seek to exclude indemnity for Royal Commission-related claims. It remains to be seen to what extent insurers may seek to invoke these exclusions; however, given the broad range of issues canvassed at the Royal Commission, policyholders should press for clarification regarding the intent of these coverage constraints – potentially limiting their applicability to a defined list of issues.
On 24 January 2019, the Australian Law Reform Commission's (ALRC) final report regarding class action proceedings and third-party litigation funders was released to the public. The report followed an extensive period of consultation with a diverse range of stakeholders concerned with class action litigation.
The most notable reforms recommended in the report include:
- a review of the legal and economic impact of continuous disclosure obligations in light of the evolving shareholder class action landscape;
- permitting solicitors to enter into contingency fee agreements in class action proceedings, subject to obtaining court approval for the proposed arrangement;
- providing the court with statutory powers for greater supervision of litigation funders and funding commissions (notably, the ALRC no longer considers a bespoke licensing regime for funders to be appropriate – this position was said to be informed by the criticisms levelled at the Australian financial services licensing regime during the Royal Commission and by ASIC's submission that the courts are better placed to supervise litigation funders);
- providing the court with statutory power to make common fund orders on the application of the plaintiff or the court's own motion;
- providing the court with an express statutory power to resolve competing class actions. This would involve the court selecting one class action to proceed while staying the competing claims. In determining which proceeding advances, the court would have power to consolidate, join or amend the competing claims, establishing one vehicle to represent the interest of group members having regard to the common issues derived from the competing claims; and
- introducing an alternative (non-judicial) means of collective redress under the applicable regulator's supervision.
Any of these reforms, if embraced, will have a profound impact on the Australian class action landscape. The ALRC's recommendations are now in the hands of the Attorney-General, Christian Porter. Market participants will keenly monitor how the recommendations are received by Parliament. Mr Porter has said that he will conduct another round of consultations with lawyers, litigation funders and other stakeholders, to 'stress test' the proposed reforms before taking any recommendations to cabinet. In circumstances, however, where a federal election is just around the corner, it's unclear to what extent a newly formed government will prioritise any reform in this space over the short term.
The timing of any future class action filings arising from the Royal Commission may turn on the outcome of appeals filed in two proceedings in which the court's ability to make common fund orders has been challenged. If it is held that courts are entitled to make common fund orders – providing third-party litigation funders with a right to extract a proportion of any settlement sum or damages ordered by a court without the need to enter into a contractual bargain with each group member – this may lead to an increase in filings, as class action promoters avoid the need to undertake a pre-commencement book building exercise, signing up group members to participate in order to justify the economics of a claim. By contrast, if it is held that courts are not entitled to make common fund orders, this may lead to fewer filings or longer periods of delay pre-commencement, as class action promoters work through the traditional book building process.
The landmark appeals in these proceedings, challenging the court's ability to make common fund orders, were heard by a joint sitting of the Court of Appeal of the Supreme Court of New South Wales and the Federal Court of Australia on 4–5 February 2019. The outcome in these appeals will also be interesting in the context of the ALRC's recommendation that courts are provided with a statutory power to make common fund orders – potentially leading to an inconsistency in the legal position and proposal of the ALRC.
The Royal Commission has firmly entrenched financial services organisations under the microscope of class action promoters, with the number of corporations presently facing claims set to expand in the wake of increased regulatory activity. In this high-risk environment, it is prudent that financial services organisations continue to actively assess all relevant risk exposures and monitor class action activity, on the basis of the sector remaining under sustained pressure for years to come. Given the potentially significant quantum of these claims, and the looming prospect of uninsured losses, all available options to mitigate risk should be carefully considered on a case-by-case basis.