Committee to examine impact of litigation funding on justice outcomes
A parliamentary committee will be asked to examine the extraordinary profits being made by the booming litigation funding industry to determine whether Australians are receiving their fair share of class action settlements.
The Parliamentary Joint Committee on Corporations and Financial Services will be given broad terms of reference to inquire into all aspects of the class action system, including whether further regulation of litigation funders is needed to improve justice outcomes.
Labor opened the floodgates to litigation funders in 2013 when it exempted them from licensing requirements and prudential supervision. In the seven years since that decision, the number of class actions filed in Australia has tripled, with the overwhelming majority bankrolled by litigation funders. Many of those funders are large, multinational organisations that demand up to 30 per cent of settlement funds.
In one recent case, the share of a settlement taken by a litigation funder represented a 390 per cent return on its investment – a remarkable financial result by anyone’s measure.
Attorney-General Christian Porter said that while litigation funders did have an important role to play in the legal system by improving access to justice, their aggressive business model was clearly impacting on the returns that members of class actions received.
'To quote Judges who’ve presided over cases involving litigation funders, the profits they make have been variously described as ‘stratospheric’, ‘arguably excessive’ and ‘not fair and reasonable’,' the Attorney-General said.
'In fact, the Australian Law Reform Commission found that when litigation funders were involved in a class action, the median return to plaintiffs was just 51 per cent, compared to 85 per cent when a funder was not involved.'
'There is something clearly wrong with this situation because the mums and dads who are members of class actions are ultimately the ones who are missing out.'
'I am even aware of a case where a group of workers who were suing their employer for unpaid entitlements did not receive a single cent from a $5 million dollar judgement awarded in their favour. Instead, the litigation funder walked away with almost $2 million and the remainder was shared between lawyers and administrators.'
That outcome prompted the National Union of Workers to state in a submission to the Victorian Law Reform Commission that: 'It is clear to us that some form of regulation needs to occur to prevent this result from occurring again'.
The Committee will also be asked to review the broader impact of the increase in class actions on the Australian economy, as well as the potential impact of a move by the Victorian Government to abolish the long-held prohibition on lawyers being paid on a contingency basis, where lawyers claim costs as a percentage of their clients’ damages.
The Government is concerned that allowing contingency fees will create conflicts of interest.
The Committee will be asked to report back to Parliament on November 9 this year and its work will complement the work already done in this area by the Australian Law Reform Commission.
The Government will shortly release its response to the ALRC inquiry.
HOUSE OF REPRESENTATIVES
NOTICE OF MOTION
MEMBER FOR PEARCE: I give notice that on the next day of sitting I shall move that the following matter be referred to the Parliamentary Joint Committee on Corporations and Financial Services for inquiry and report by 9 November 2020:
Whether the present level of regulation applying to Australia’s growing class action industry is impacting fair and equitable outcomes for plaintiffs, with particular reference to the following:
- what evidence is available regarding the quantum of fees, costs and commissions earned by litigation funders and the treatment of that income;
- the impact of litigation funding on the damages and other compensation received by class members in class actions funded by litigation funders;
- the potential impact of proposals to allow contingency fees and whether this could lead to less financially viable outcomes for plaintiffs;
- the financial and organisational relationship between ligation funders and lawyers acting for plaintiffs in funded litigation and whether these relationships have the capacity to impact on plaintiff lawyers’ duties to their clients;
- the Australian financial services regulatory regime and its application to litigation funding;
- the regulation and oversight of the litigation funding industry and litigation funding agreements;
- the application of common fund orders and similar arrangements in class actions;
- factors driving the increasing prevalence of class action proceedings in Australia;
- what evidence is becoming available with respect to the present and potential future impact of class actions on the Australian economy;
- the effect of unilateral legislative and regulatory changes to class action procedure and litigation funding;
- the consequences of allowing Australian lawyers to enter into contingency fee agreements or a court to make a costs order based on the percentage of any judgment or settlement;
- evidence of any other developments in Australia’s rapidly evolving class action industry since the Australian Law Reform Commission’s inquiry into class action proceedings and third-party litigation funders; and
- any matters related to these terms of reference.