Litigation funders to be subject to greater regulatory oversight

The Federal Government has announced that litigation funders will need to hold a financial services licence and comply with the managed investment scheme regulatory regime.

Litigation funders will be required to obtain an Australian Financial Services Licence (ASFL) under new regulation announced by the Federal Government on 22 May. Additionally, they will have to comply with the managed investment scheme regulatory regime with both changes taking effect in three months from 22 May.

The changes will mean that, like other ASFL-holders, litigation funders will be required 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.

“There is no reasonable basis for litigation funders to continue to be exempt from the same regulation that applies to the entities which they seek to litigate against," Treasurer Josh Frydenberg is quoted as saying in a 22 May report in The Australian Financial Review (AFR).

The changes complement the inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding, the Treasurer said in a press release announcing the changes.

The AICD has long held concerns about Australia’s high rate of securities class actions financed by litigation funders. The increase in class actions is leading to a risk-averse culture in Australia’s boardrooms.

“The COVID-19 environment has highlighted long standing issues with opportunistic securities class actions that are not focussed on access to justice as much as profit for funders’ investors. It is this environment which has triggered the current crisis in the Australian D&O market,” AICD CEO and MD Angus Armour said.

“The upcoming Parliamentary Inquiry into litigation funding and class actions is another opportunity to look closely at how the system is working and whether it is operating in the public interest, and to make any necessary changes.”

The AICD is continuing to advocate for permanent reform in relation to the interaction between Australia’s continuous disclosure, misleading and deceptive conduct laws and the class action regime.

The AICD has also called for a targeted temporary COVID-19 class actions safe harbour, given the heightened risk of litigation in such an uncertain operating environment.

View our media release here.