Client Update: Obstacles to class action funding cleared
19 July 2012
In brief: The Federal Government has cleared the way for litigation funders to fund class actions without an Australian financial services licence and without complying with the requirements for managed investment schemes. This does not, however, resolve the question of whether litigation funders need a licence to fund non-group claims. Partners Ross Drinnan (view CV), Jenny Campbell (view CV) and Lawyer Andrew Ta report.
- What has changed?
- Background to the managed investment scheme declaration
- Background to the AFSL exemption
- Managing conflicts
The Corporations Regulations 2001 (Cth) have been amended (effective from 13 January 2013) to provide that:
- litigation funding schemes are not managed investment schemes this reverses the effect of the Full Federal Court's decision in the Multiplex shareholder class action (as discussed below);
- funders of class actions or other grouped proceedings do not require an Australian financial services licence (AFSL);
- lawyers offering 'no win, no fee' arrangements do not require an AFSL; and
- funders taking advantage of the AFSL exemption must put in place adequate arrangements for managing conflicts of interest.
Importantly, the AFSL exemption does not extend to the funding of litigation other than class actions or other grouped proceedings. The High Court is, however, currently considering the need for an AFSL in those circumstances.
The Explanatory Statement provides the following general policy basis for the amendments:
The Government supports class actions and litigation funders as they can provide access to justice for a large number of consumers who may otherwise have difficulties in resolving disputes. The Government's main objective is therefore to ensure that consumers do not lose this important means of obtaining access to the justice system.
In 2009, the Full Federal Court held that the litigation funding arrangements in a shareholder class action constituted a managed investment scheme.1 The effect of this decision was to subject litigation funders of class actions to onerous compliance obligations, including the requirement to appoint a company holding an AFSL as 'responsible entity' to operate the scheme, to register the scheme with the Australian Securities and Investments Commission (ASIC), to prepare a product disclosure statement, to adopt a complying constitution and compliance plan for the scheme, and to provide ongoing disclosure to members of the scheme.2 The Federal Government has publicly stated on a number of occasions that it does not consider these requirements to be appropriate for litigation funding schemes.3
Accordingly, shortly after the Multiplex decision, ASIC granted transitional class order relief from the obligations applicable to managed investment schemes to lawyers and litigation funders involved in legal proceedings structured as funded class actions, pending legislative amendment.4 The new amendments will resolve this issue permanently.
In 2011, the New South Wales Court of Appeal held that a litigation funding arrangement that Chameleon Mining NL had entered into constituted a 'financial product' because it was a facility through which financial risk was managed.5 The court went on to find that the arrangement in question could be rescinded because the funder did not hold an AFSL to deal in financial products. Special leave was granted to appeal that decision and the High Court's judgment is currently reserved, following a hearing last month.
The funding agreement in the Chameleon Mining case is an agreement specific to one litigant and does not relate to a class action or other grouped proceedings. Notwithstanding this, following the Court of Appeal's decision, ASIC extended the class order relief referred to above, to exempt the providers of all litigation funding arrangements from the requirement to hold an AFSL.6 This class order relief remains in place until 30 September 2012. Further extensions are possible, pending the outcome of the High Court appeal in Chameleon Mining.
Irrespective of the outcome of the High Court appeal, the recent amendments make it clear that the providers of litigation funding for class actions or other grouped proceedings will not require an AFSL. However, as those amendments do not address the position regarding the funding of other types of claims, the High Court's judgment in Chameleon Mining will still be of broad interest and may have a significant impact on the nature of the litigation funding industry in this country (subject, of course, to the potential for further legislative reform). So far as we are aware, IMF (Australia) Limited is the only litigation funder that currently holds an AFSL.
As mentioned above, the amendments require funders who take advantage of the AFSL exemption to have adequate arrangements for managing conflicts of interest. The amendments also give some guidance as to what those arrangements must address. ASIC has said that it expects to release a consultation paper on managing conflicts of interest for litigation funding schemes (and also proof of debt schemes) in the next month.
The amendments clarify the status of litigation funding for class actions and other grouped proceedings. In doing so, they reflect a policy position that both litigation funding and class actions serve an important role in providing access to justice.
The question remains, however, whether litigation funders require an AFSL to fund other types of proceedings. In circumstances in which funding non-group litigation is becoming an increasing focus for many funders, this question is an important one. We will report further following the High Court's judgment in Chameleon Mining.
- Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd  FCAFC 147. See also Focus: A Cross for Litigation Funding.
- See Chapters 5C and 7 of the Corporations Act 2001 (Cth).
- See, for example, 'Government Acts to Ensure Access to Justice for Class Action Member', Minister for Financial Services, Superannuation and Corporate Law, 4 May 2010; Explanatory Statement for Select Legislative Instrument 2012 No. 172 and Explanatory Commentary for Exposure Draft Corporations Amendment Regulations 2011 Funded Class Actions.
- ASIC Class Order [CO 10/333]: Funded representative proceedings and funded proof of debt arrangements. See also Focus: Clarification of Class Action Funding.
- International Litigation Partners Pte Ltd v Chameleon Mining NL  NSWCA 50. See also Focus: Litigation Funding Hits Another Speed Hump.
- ASIC Class Order [CO 11/128]: Variation of Class Order [CO 10/333].
- Ross DrinnanPartner, Practice Leader, Disputes & Investigations,
Ph: +61 2 9230 4931
- Jenny CampbellPartner,
Ph: +61 2 9230 4868
- Belinda ThompsonPartner,
Ph: +61 3 9613 8667
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