Inquiry slams ‘excessive profits’ of compensation firms

The final report of the parliamentary joint committee on corporations and financial services’ inquiry into class action regulation was handed down this week, recommending a host of new oversight procedures around fees and funding of actions while stopping short of Treasurer Josh Frydenberg’s proposals to require litigation funders subscribe to the AFSL regime.

Recommendations of the committee included that independent fee assessors could be appointed by the Federal Court to oversee fee arrangements between legal firms, litigation funders and class members, and that the court would also have powers to impose cost orders on litigation funders.

The committee also recommended the Federal Court have oversight of class action settlements and approve arrangements such as who is funding the action and what percentage of settlement funds are being claimed by funders before a settlement can be agreed to.

The report stated that the court currently had “limited powers to regulate litigation funders and intervene in their contractual relationships with representative plaintiffs, even in instances where fees appear unreasonable, disproportionate or unfair”.

“Greater oversight by, and interventionist powers for, the Federal Court are required to constrain the large portions of settlement sums that are obtained by litigation funders by way of reimbursement of fees and commissions”.

The committee noted that Frydenberg’s introduction of rules for litigation funders to comply with the AFSL regime in August had been given a “flexible and facilitative approach” by ASIC and said this should continue, recommending a specific legislative regime for litigation funders be introduced to parliament.

It also recommended temporary relief from continuous disclosure laws applied during the COVID pandemic be made permanent to stem the rising incidence of shareholder class actions centring around disclosure, saying these actions were “generally economically inefficient” and “amount to shareholders effectively suing themselves”.

Returns skyrocketing for class action funders

The news comes following comments from AMP chief executive Francesco De Ferrari earlier in the year that Australia was “the second most attractive” market for class action litigation in the world given the returns available to litigation funders.

“Menzies [Research Centre] research states that in 2016, 59 per cent of settlements went to plaintiffs, that number has dropped to 39 per cent only so litigation plaintiffs are taking a smaller share of settlements,” Mr De Ferrari said at a parliamentary hearing in July.

“That creates an escalating cost of doing business in Australia – it is reflected in the fact that a number of large reinsurers are considering Australia very dangerous to reinsure the risk. That will ultimately result in job losses and higher costs being passed to consumers.”

The committee echoed Mr De Ferrari’s comments in its findings, stating that “Australia’s highly unique litigation funding market has become a global hotspot for international investors to generate investment returns unheard of in any other jurisdiction”.

“This is directly the result of a regulatory regime described by ASIC as ‘light touch’ and under which no successful action by a regulator has ever been taken against a funder,” the report said.

“Mum and dad investors signing up to a litigation funding agreement as part of a class action can never hope to have the sophisticated understanding of corporate law or financial products that their lawyers and funders possess.

“If this asymmetry is not addressed to protect the interests of class members, increasing competition from more funders entering the market will not deliver lower prices for consumers.”