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Client Update: ASIC guidance on litigation funders' obligation to manage conflicts

26 April 2013

In brief: The Federal Government has recently limited the regulation of litigation funding to an obligation to have adequate arrangements in place to manage conflicts of interest. In the latest chapter in this continuing story, ASIC has released a Regulatory Guide that 'fleshes out' what it considers funders must do to comply with that obligation. Partner Jenny Campbell (view CV) and Senior Associate Mark Hare report.


After many years of uncertainty, the Federal Government has enacted legislation that effectively exempts litigation funders from all forms of financial services regulation, including:

  • the requirements associated with operating a managed investment scheme;
  • the requirement to hold an Australian Financial Services Licence (AFSL); and
  • the conduct, anti-hawking and disclosure provisions of Chapter 7 of the Corporations Act 2001 (Cth) (together, the Funding Exemptions).1

For further discussion about the Funding Exemptions, see our Client Update: Regulations clear the way for litigation funding (again).

The key driver for the enactment of the Funding Exemptions was a policy decision by the Federal Government not to impose a burdensome regulatory regime on litigation funders. This was based on a desire to ensure that third party funding continued to be available as a means of providing access to justice (through funded class actions) for a large number of consumers who may otherwise have difficulties in resolving disputes.2 It did, however, stipulate that a funders' ability to rely on the Funding Exemptions is contingent on the funder:

  • maintaining adequate practices for managing any conflict of interest that may arise in relation to a 'litigation scheme' (an arrangement in which third party funding is provided in connection with the pursuit of legal remedies); and
  • developing and implementing specified written procedures for identifying and managing conflicts of interest (the Conflicts Requirements).3

Conflicts in the funding context

ASIC has recognised that, in litigation schemes, there is an inherent tension between the interests of the funders, lawyers and members of the scheme. Those conflicts can arise in a variety of circumstances including where:

  • the lawyers act for both the funder and the members;
  • there is a pre-existing legal or commercial relationship between the funder, lawyers and/or members; and/or
  • the funder has control of, or has the ability to control, the conduct of proceedings.

ASIC suggests that the divergence of interests between the funder, lawyers and members could affect the recruitment of prospective members, the terms of any funding agreement and any decision to settle or discontinue the action.4

In our opinion, this analysis of the potential for conflicts to arise in the litigation funding context is far from exhaustive. It does, however, provide some useful background and is clearly the basis for ASIC's guidance on how conflicts in this context should be managed.

The ASIC Guide – managing conflicts in the funding context

In Regulatory Guide 248: Litigation schemes and proof of debt schemes: Managing conflicts of interest (the ASIC Guide), ASIC has set out its view on what the operator of a litigation scheme must do to satisfy the Conflicts Requirements. Its primary objective in doing so is the protection of members of litigation schemes.5

To that end, ASIC has 'put some meat on the bones' of the Conflicts Requirements by identifying what it expects funders to do in order to comply with those requirements, from the time that the recruitment of prospective members of a litigation scheme commences until all members cease to have an interest in the scheme. 

The table below sets out some of the key aspects of the Conflicts Requirements and the additional guidance provided by ASIC.

Conflicts Requirements  Additional ASIC Guidance

Procedures for adequately managing conflicts of interest:

  • business review to identify and  assess potential conflicts
  • written procedures
  • implementation of procedures
  • regular review
  • oversight by senior management 

Funders must be able to demonstrate that they have procedures to identify divergent interests and where conflicts might arise; assess those interests and potential conflicts; and decide upon and implement an appropriate response to those divergent interests and potential conflicts.

Those procedures should be designed and tailored according to the nature, scale and complexity of the litigation scheme. 

Procedures must be implemented, maintained and accompanied by effective compliance monitoring to ensure that the procedures are actually followed and appropriate action taken when non-compliance is identified. This means the procedures must be integrated into the culture of the funder's business. Primary responsibility for implementation and management should rest with senior management.

Funders' commercial interests need to be pursued in a manner that ensures adequate protection of members' interests.

Disclosure of conflicts of interest 

Funders must have written procedures dealing with how to effectively disclose conflicts of interest to members and prospective members. 

Those procedures should include procedures about providing prospective members with information about the different significant interests of the funder, lawyers and members, and how they may conflict. 

Ongoing disclosure is also required to existing members of any conflicts that arise in the course of a litigation scheme at the first reasonable opportunity.

Disclosure of conflicts should be timely, prominent and specific. They must contain enough details for members to understand the potential impact of the divergent interests. Boilerplate disclosure is unlikely to be sufficient.


Managing situations in which interests may conflict:

  • recruitment of prospective members
  • terms of funding agreement
  • lawyers' obligation to funders and members
  • independence
  • settlement agreements 

Funders must have procedures in place to ensure that advertising or recruitment practices do not mislead prospective members about significant features, risks or returns associated with a litigation scheme.

Funders should consider including the following terms in the funding agreement: an obligation to comply with the Conflicts Requirements and a right to terminate for non-compliance; a cooling-off period; an obligation for the lawyer to give priority to members' instructions over instructions from the funder; an obligation to provide clear and full disclosure of any proposed settlement and of the terms of the agreement between the funder and lawyers. Agreements should also be checked for compliance with the existing body of law on unfair contracts and unconscionability.

Where there is no direct contractual relationship between the lawyers and each member, the funder should ensure that they engage the lawyers on terms that make it clear that the lawyers must ensure that the members' interests are adequately protected. It is appropriate for the funders to give instructions to the lawyers and for the lawyers to consider these instructions in light of their obligations to members.

There must either be independence between the funders, lawyers and members, or disclosure of any relationships that exist between them.

Where litigation schemes are settled without proceedings being issued, the terms of any settlement agreement must be approved by counsel (or senior counsel if involved). Counsel should consider the same issues considered by the court in approving the settlement of class actions proceedings.

Failure to comply with the Conflicts Requirements is an offence. The ASIC Guide does not, however, have the force of law. ASIC emphasises that its guidance is not exhaustive and that funders must take responsibility for determining their own approach to managing interests that may conflict. It has, however, said that arrangements that are not consistent with its guidance are less likely to be compliant with the Conflicts Requirements and will be exposed to a greater risk of regulatory action.

Incidentally, the ASIC Guide also applies to funders who do not rely on the Funding Exemptions, but conduct their funding activities under an AFSL. To the best of our knowledge, following IMF (Australia) Limited's announcement on 19 April 2013 that it has cancelled its AFSL (in reliance on the Funding Exemptions), there are no funders currently conducting their activities under an AFSL.

A step in the right direction?

ASIC has telegraphed to funders an intention to give the Conflicts Requirements some 'teeth' by requiring action and not just paperwork. If it actively polices the litigation funding community's compliance with its guidance, it may impose a layer of regulation over the conduct of litigation funders and thereby deliver some protection to funded litigants. That, in our opinion, would be a step in the right direction (at least in respect of onshore funders).

The Conflicts Requirements (as supported by the ASIC Guide) do not, however, address some of the concerns we have previously raised about a largely unregulated funding market.6 Among other things, an unregulated funding market leaves funded litigants exposed to an impecunious and/or unscrupulous funder (even more so if the funder is offshore). In our opinion, at the very least, capital adequacy requirements should be imposed to prevent a situation in which a funder puts itself into liquidation to avoid an adverse costs order (in which case the funded party would be liable and, if they can't pay, may result in a successful defendant not recovering its costs). The fact that funded litigants expose themselves to significant costs liability in reliance on their funding arrangements would also appear to be very good reason for subjecting funders to the additional obligations and supervision applicable to the holders of an AFSL. Arguments to this effect have, however, 'fallen on deaf ears' among policymakers for the time being. Accordingly, it may be that the questions are not revisited until a funded litigant is 'burned' by a funder.

What is next?

At the time of issuing the ASIC Guide, ASIC announced that it will shortly be producing material for consumers to help them decide whether they should participate in a class action.7 We expect that this material will address some of the issues consumers should take into account in considering becoming a member of a litigation scheme. It remains to be seen whether it will go so far as to inform consumers of the potential risks referred to above. 

  1. Corporations Amendment Regulation 2012 (No.6) (Cth). These regulations are effective from 13 July 2013, but ASIC has granted class order relief which means that, for all practical purposes, each of the exemptions is already in effect.
  2. Explanatory Statement, Corporations Amendment Regulations 2012 (No.6), 12 July 2012.
  3. These requirements will be in regulation 7.6.01AB of the Corporations Regulations 2001 (Cth) as of 13 July 2013.
  4. ASIC Regulatory Guide 248: paragraphs 11-15.
  5. ASIC 13-085MR ASIC releases guidance on managing conflicts of interest in litigation schemes and proof of debt schemes (22 April 2013).
  6. Allens Client Update: Regulations clear the way for litigation funding (again).
  7. ASIC 13-085MR ASIC releases guidance on managing conflicts of interest in litigation schemes and proof of debt schemes (22 April 2013). 

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