Applying the brakes to the ambulance chasers

29 May 2020

One thing was as certain as night follows day from the Royal Commission into Misconduct in the Banking, Financial Services and Superannuation industries – that the courts of Australia would be busy long after the Commissioner, Kenneth Hayne, published his final report and recommendations.

And so it proved to be, particularly when the legal environment was further stirred by the Australian Prudential Regulation Authority’s (APRA’s) decision to pursue legal action against IOOF and some of its officers on the basis of issues raised during the Royal Commission.

It is history that APRA’s action against IOOF and its officers failed and the regulator opted not to pursue the matter further and, late last month, a further manifestation of

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Royal Commission-related legal action came to an end when IOOF settled a class action mounted in the NSW Supreme related to the APRA action without paying anything to the plaintiff and without paying costs.

What needs to be understood about that class action is that it was entirely typical of its type – fuelled by the publicity/opportunity afforded by the Royal Commission, somewhat speculative in nature and underwritten by a litigation funder.

It seems entirely probable that the outcome of the settlement with IOOF will show up in red ink on the litigation funder’s balance sheet and some might be tempted to suggest that the whole episode is reflective of the speculative nature of litigation funding – the weighing of odds; the placing of a bet.

And that is why the Federal Government is quite right to be moving to ensure that litigation funders are subject to greater regulatory oversight via a requirement to hold an Australian Financial Services License (AFSL) and to comply with the managed investment scheme (MIS) regime.

Litigation funders have flourished in Australia over the past decade in part because those running them are very good at running the ruler over a legal issue and determining its chances of success and failure and, in part, because they have acted in a largely unregulated environment.

As the Federal Treasurer, Josh Frydenberg, put it in his announcement: “Litigation funders are currently exempt from holding an AFSL and being categorised as a managed investment scheme. As a result, litigation funders do not face the same regulatory scrutiny and accountability as other financial services and products under the Corporations Act.”

Because litigation funders will, in future, be required to hold an AFSL and to operate within the MIS regime, they will need to be far more transparent in their operations and, to some degree, the rationale which would prompt them to underwrite a class action off the back of a Royal Commission.

Money Management is not suggesting that litigation funders should be unduly constrained or that many of them hitherto had questionable intentions. There are plenty of examples of funders having underwritten worthy actions on behalf of plaintiffs who would otherwise have been disadvantaged by the cost and complexity of the Australian legal system.

But financial advisers, amongst others, will see no problem in lawyers and their litigation funders being asked to act under an AFSL regime which requires them to: 

  • Act honestly, efficiently and fairly;
  • Maintain an appropriate level of competence to provide financial services; and
  • Have adequate organisational resources to provide the financial services covered by the licence.

Indeed, it will be interesting to see whether the imposition of an AFSL and the consequent requirements it imposes on the funders has any significant effect on the number of cases which are pursued in Australia.

What is interesting about Frydenberg’s announcement on the AFSL requirement for litigation funders is that it is being imposed well ahead of an inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services which is not due to report until 7 December, this year.

Irrespective of what that committee finds, an MIS regime for litigation funders will become a fait accompli from about September.

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