On 11 December 2017, then Attorney-General of Australia, Senator the Honourable George Brandis QC, asked the Australian Law Reform Commission (ALRC) to consider whether and to what extent class action proceedings and third party litigation funders should be subject to Commonwealth regulation. The inquiry is set against the background of:

(a)      The increased prevalence of class action proceedings in Australian courts; and

(b)      The important role that litigation funders of class actions and other legal proceedings, including arbitral proceedings, play in securing access to justice.

In the 2016/2017 financial year, 58% of class actions filed in Australia involved litigation funding.  In the 2017/2018 financial year, approximately 65% of class actions filed are expected to involve litigation funding.

On 23 May 2018, the ALRC released a discussion paper noting that the aim of the inquiry is “to ensure that the costs of [class actions] are appropriate and proportionate and that the interests of plaintiffs and class members are protected.”  The discussion paper is a timely contribution to the debate that has been raging for quite some time on the appropriate regulation of class action proceedings and litigation funding.  In general, the paper lends support to the supervisory approach to case management increasingly being adopted in the Federal Court.

Focus of the Inquiry

In short, the terms of reference require the ALRC to consider two overarching issues of the class action regime:  The integrity of third-party funded class actions, and the efficacy of the class action system.

More specifically, the terms of reference require the ALRC to consider:

  1. Whether there is adequate regulation of conflicts of interest between litigation funder and plaintiffs and between lawyer and litigation funder, including the relationship between a litigation funder and a legal practice;
  2. The desirability of imposing prudential requirements, including relating to capital adequacy, and also requirements relating to the character and suitability of litigation funders; and
  3. The adequacy of regulation around the costs charged by solicitors in funded litigation and, in particular, whether there is adequate regulation of the distribution of proceeds of litigation, including a consideration of the desirability of statutory caps on the proportion of settlements or damages awards that may be retained by lawyers and litigation funders.

Suggested Proposals

The ALRC has put forward the following proposals:

  • A review by the Australian Government of the legal and economic impact of continuous disclosure obligations of entities listed on public stock exchanges and those relating to misleading and deceptive conduct;
  • The introduction of a ‘litigation funding licence’ with obligations similar to those imposed on Australian Financial Services Licence holders by section 912A of the Corporations Act 2001 (Cth);
  • The development of specialist accreditation for solicitors in class action law and practice;
  • Amendments to the Australian Solicitors’ Conduct Rules prohibiting solicitors and law firms from having financial or other interests in a third party litigation funder, and obliging disclosure of third party funding in any proceedings, including arbitration;
  • Allowing solicitors to enter into contingency fee agreements in class action proceedings, subject to certain qualifications and leave of the court;
  • Giving the Federal Court express statutory power to reject, vary or set the commission rate in third party litigation funding agreements and contingency fee agreements;
  • All class actions be initiated as open class actions, and incorporating a system to resolve competing class actions in which the Federal Court will stay all but one of the competing claims after an initial assessment to determine which one of the proceedings will progress;
  • The appointment of a referee to assess the reasonableness of costs charged in a class action prior to settlement approval; and
  • Consideration for a federal collective redress scheme that would enable corporations to provide appropriate redress to those who may be entitled to a remedy.

What next?

The ALRC has invited submissions by 30 July 2018 to assist with the reform process in the inquiry.  There will therefore be an opportunity for all individuals and corporations to make submissions.

Our submission will focus on the evolving class action climate and the importance of managing conflicts of interest for lawyers and funders and the implications of securities class actions  for the Australian D&O market.

The ALRC’s report will be delivered to the Attorney-General on 21 December 2018.