Amid a reported increase in the number of class actions over the past decade, the Australian Government has announced changes to the Corporations Regulations 2001 (Cth) to facilitate greater regulatory oversight of litigation funders operating in Australia. The changes, set to come into operation on 22 August 2020, will require funders of class action litigation to hold an Australian Financial Services Licence (‘AFSL’). After some initial confusion following the announcement, the Government has now provided welcome clarity that the changes are confined to class action litigation funders, and do not affect funders of insolvency litigation or single plaintiff claims.
Since 2010, litigation funders have been exempt from requirements to register as managed investment schemes or obtain an AFSL. In the decade since then, the number of class actions has increased and class actions have been subjected to increased scrutiny from the media, parliamentary committees and independent law reform commissions. This has reignited public debate as to whether litigation funders should be more tightly regulated.
On 22 May 2020, the Australian Government announced that litigation funders operating in Australia will be required to hold an AFSL and to register as managed investment schemes, with the corresponding obligations set out in the Corporations Act 2001 (Cth) (‘the Act’). Initially little detail was provided as to the text or effect of the changes. On 23 July 2020, the Government released the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (‘the Amendment Regulations’) which clarified the scope and impact of the changes.
Under the Amendment Regulations, class action litigation funders operating in Australia will be required to obtain an AFSL in accordance with Chapter 7 of the Act and register as managed investment schemes under Chapter 5C of the Act.
As AFSL holders, class action litigation funders will be required to (amongst other things):
As registered managed investment schemes, class action litigation funders will also be required to (amongst other things):
The Amendment Regulations apply to funding arrangements entered into on or after 22 August 2020.
Effect on Insolvency Litigation Funders
The Government’s initial announcement created uncertainty as to what types of litigation funders would be affected by the reforms. While the reforms are ostensibly targeted towards increasing transparency in the class action industry, there were concerns that funders of other types of litigation would also be swept up in the reforms.
This was of particular concern to the insolvency world since litigation funders play a vital role in assisting insolvency practitioners to recover assets for the benefit of creditors. Without funding, many claims could not be pursued, since insolvent estates are usually impecunious by definition. Such funding also has the public benefit of ensuring that those who acted in contravention of the law in connection with the business of an insolvent entity can be held accountable for their wrongdoing.
Thankfully the uncertainty created by the Government’s initial announcement has been alleviated now that the text of the Amendment Regulations and their accompanying Explanatory Statement has been released. These documents clarify that only funders of class action litigation will be subject to the new requirements to register as managed investment schemes and hold an AFSL. Other litigation funders, such as funders of insolvency litigation and single plaintiff litigation, will continue to be exempt from those requirements.
The Amendment Regulations are unlikely to be the last change to the regulatory landscape of class action funding in Australia. The Parliamentary Joint Standing Committee on Corporations and Financial Services is due to report on litigation funding and the regulation of the class action industry by 7 December 2020, and this may lead to further scrutiny and reform in this area.
The announcement of the Amendment Regulations provides some reprieve to insolvency practitioners and their litigation funders who had been left uncertain as to how any changes could affect their operations. Given the vital role litigation funders play in ensuring the administration of justice in an insolvency context, it is welcome news that the Government has heeded industry concerns and ensured that such funding continues to be exempt from increased regulation. This is particularly pertinent in these uncertain economic times, which may very well lead to an increase in insolvency-related litigation in the near future.