The ALRC, which is chaired byFederal Court judge Sarah Derrington, said there were “inherent risks associated with litigation funders”.
“This includes the risk that third-party litigation funders may fail to meet their obligations under funding agreements, use the Federal Court of Australia for improper purposes, or exercise influence over the conduct of proceedings to the detriment of group members,” the report said.
However, the commission said it favoured increasing the powers of the court “in lieu of a licensing regime for litigation funders”.
“The recommendations provide for greater Court oversight of the litigation funding agreement, require that the funder indemnifies the lead plaintiff against an adverse costs order, and create a presumption in favour of security for costs.”
It said funding commissions had ranged from 17 per cent of a $3 million settlement to 62 per cent of a $6.6 million settlement. The return to the litigants, or class, ranged from 29 per cent of the $6.6 million settlement to 69 per cent of a $75 million settlement.
ASIC argued strongly in the consultation phase that the courts were better placed to regulate class action and funding agreements, and the commission has made that a theme of its final report.
Amid a raft of suggested changes to the Federal Court Act is that there be an express statutory power to order a common fund – thelegality of which is subject to an appeal to be heard in February by the Federal Court and NSW Supreme Court.
The ALRC also backed contingency fees for lawyers, which is a departure from the current system under which funders pay the legal costs and take a percentage of the judgment. It said the introduction of a limited percentage-based fee model for solicitors would decrease costs to litigants.
“It will provide a greater return to group members, further enable medium-sized class action matters to proceed, and, as class actions are strictly supervised by the Court, provide protection for representative plaintiffs and group members against paying a single yet disproportionate or unreasonable fee,” the commission said.
The report also proposes a voluntary accreditation scheme for solicitors acting in class action proceedings and says solicitors should be banned from having an interest in a third-party funder.
Plaintiff law firm Slater and Gordon noted it was the third consecutive government report which had recommendedthe introduction of contingency fees, which has been opposed by leading business figures.
The head of the firm’s class actions practice, Ben Hardwick, said such a move was “overwhelmingly in the interests of consumers” .
“Even those normally on the other side of the class actions debate, would have to concede that a court supervised contingency fee model, such as proposed by the Commission, will create greater options for everyday Australians and that it makes economic sense,” Mr Hardwick said.
Herbert Smith Freehills partner Jason Betts predicted contingency fees would lead to more claims with “marginal merit”.
“Supply of class actions is greater than demand, which is why most recent shareholder cases involve competing funders positioning themselves for the right to sue,” Mr Betts said.
“Contingency fees will mean claims that are currently rejected by Australian funders get picked up by law firms looking to aggressively build a class action practice. They will run less meritorious claims. It’s another burden for Australian business.”
Mr Betts, who is acting forAMP as it fights off multiple claims, said the ALRC’s push to cut the state courts out of shareholder class actions and give the Federal Court sole jurisdiction was controversial.
“It’s an uncomfortable proposal because NSW, Queensland and Victoria all have their own class action regimes, and there’s a brand new co-operation protocol in place between the Federal Court and NSW Supreme Court setting rules for managing competing claims which has not yet had a chance to take effect.”
His fellow Freehills partner Ruth Overington backed a review of the continuous disclosure laws, saying Australia’s regime was out of step with the United Kingdom.
“In the UK, the plaintiff needs to show some reckless or dishonest conduct. This requirement reduces the risk of opportunistic litigation.”
“The argument that class action risk moderates board behaviour does not withstand scrutiny as Australian class actions can be initiated without any proof that reckless or dishonest conduct has occurred.”
However, Mr Hardwick said the review was “unjustified” and that the laws protected “mum-and-dad retail investors”.
“Given what we have seen through the Banking Royal Commission, now is not time to relax disclosure and transparency standards for corporate Australia.”
Mr Hardwick welcomed the Commission’s proposal to put out to tender the work involved in administering settlement schemes.
“Ultimately, group members in class actions want to talk to lawyers not accountants, so any system that routes group members through intermediaries will ultimately prove to be less efficient.”
John Walker, the chairman of the Association of Litigation Funders, was surprised to see the option of licensing of litigation funders dropped in favour of a security for costs regime overseen by the courts rather than ASIC.
“If the industry is required to put cash into a bank account to cover adverse cost order exposure, it will result in less capital entering the market and the capital that comes in will be more expensive. Bank or insurance guarantees are sufficient.”
The acting Attorney-General, Greg Hunt, said the government would now further engage with stakeholders to ensure “the class actions regime provides just and effective outcomes for all Australians”.