Litigation funders on the spot

Are litigation funders a danger to the Australian economy or an important pillar that improves access to justice?

When Attorney General Christian Porter announced an inquiry into Australia’s class action system early this month, he left no doubt as to who he saw as the villains of the piece.

Mr Porter claimed the litigation funding industry was growing in size and making enormous profits, leaving class action members to fight over the scraps once legal fees and other costs were paid.

Treasurer Josh Frydenberg followed up a week later with new rules that will require litigation funders to hold an Australian financial services licence, exposing them to stricter transparency and accountability measures.

(click here to view a PDF version of the full special report)

Mr Frydenberg also cited concern over opportunistic class actions when he eased rules governing continuous disclosure by company directors.

Business Council chief executive Jennifer Westacott used similar language when she endorsed the treasurer’s actions.

“Every dollar spent defending against opportunistic class actions is a dollar that is not spent on creating a new job or saving an existing one,” Ms Westacott said.

Ai Group has been more vocal in its criticism.

“The recent explosion in class action claims by plaintiff law firms, typically backed by overseas litigation funders, is a clear and present danger to Australia’s fragile economy,” chief executive Innes Willox said last year.

“Investment and jobs are threatened and business insurance costs are going through the roof.”

Despite all this, the Western Australian government is pressing ahead with moves to establish a legislative class action scheme in this state.

“Class actions, at its heart, is an access to justice issue,” WA Attorney General John Quigley said last June when introducing the Bill to parliament.

“This regime will not only enhance access to justice by reducing the cost of court proceedings to the individual and improve the individual’s ability to access legal remedies, it will enable court resources to be used more efficiently.”

This view is echoed by Perth executive Andrew Saker, who runs ASX-listed Omni Bridgeway, formerly called IMF Bentham and the biggest player in the litigation-funding sector.

“This is an industry that has grown out of a need,” Mr Saker told Business News.

“It provides access to justice for people who cannot make a claim on their own.”

Mr Saker supports improved regulation of the sector.

“The industry does need regulation,” he said.

“We see that as a step in the legitimisation of the industry.”

Omni Bridgeway welcomed the new licensing rules and said it planned to reapply for an Australian financial services licence (AFSL) at the first opportunity.

It held an AFSL until 2013, at which time it was required to hand it back following the exclusion of litigation funding from the licensing regime.

Omni wants any new licensing requirements to be extended to law firms that act as funders of class actions, under ‘no win no fee’ arrangements.

This would mostly affect firms such as Slater & Gordon and Maurice Blackburn.

Mr Saker accepts there has been an increase in class action activity, stemming in part from the Financial Services Royal Commission and multiple cases of wages underpayment, but denies there has been an explosion of activity.

Monash University business law professor Vince Morabito, whose research Omni has part-funded, supports Mr Saker’s view.

Professor Morabito found the number of class actions filed in Australia jumped from 38 in 2016-2017 to 56 in 2017-18, and rose again to 59 last financial year.

Omni is currently involved in 14 Australian class actions, five of which are on behalf of shareholder groups.

Mr Saker also disputes claims the industry makes super profits, saying it was necessary to look at a portfolio of cases.

“We made really good money on some cases but really ordinary money on others,” Mr Saker said.

He has proposed a six-month moratorium on new class actions associated with COVID-19.

The Association of Litigation Funders of Australia (ALFA) is also open to improved regulation, but has been more critical of Canberra’s approach.

Sydney-based John Walker, who co-founded IMF Bentham with Perth’s Hugh McLernon and now heads Investor Claim Partner, is the association’s chair.

Mr Walker said the launch of another inquiry begged the question as to why taxpayers had incurred the cost of several recent reviews by the Productivity Commission, the Victorian Law Reform Commission and the Australian Law Reform Commission. 

“ALFA is disappointed that the federal government has not responded to these reports in any meaningful way before embarking on the parliamentary inquiry and announcing the licensing changes,” the association stated.