The Productivity Commission has recommended tighter regulation for third party litigation funders in its Final Report on Access to Justice Arrangements released by the Federal Government today.1 The Commission has also recommended the relaxation of restrictions on the use of damages-based contingency fees so as to allow lawyers to receive a percentage of the amount of damages recovered for a client in litigation.2

Third party litigation funders have increasingly moved into the funding of large scale class actions in Australia in the last decade.  Whilst the recommendations if implemented are likely to have an effect on how these matters are funded, they are unlikely to curb the current appetite for this type of litigation – particularly in the area of securities class actions which have seen a sharp increase.

Litigation funded securities class actions were singled out for specific mention by the Commission which has recommended that any remaining concerns regarding specific types of funded actions such as these were more appropriately dealt with through amendments to underlying laws rather than further restrictions on funders.3

Federal Attorney General George Brandis has previously made clear that although he supports increased regulation of litigation funders, he opposes the introduction of damages-based contingency fees and is concerned by what he has described as “wildcat and opportunistic class actions”.  However, supporters of a relaxation of laws around damages-based billings say it would bring increased competition to the area of litigation funding which would only benefit class action members.

The Commission's brief

In June 2013, the then Attorney-General Mark Dreyfus QC asked the Productivity Commission to examine issues around access to justice in Australia. The Government was concerned that the cost of accessing justice services was prohibitive for many Australians and asked the Commission to examine the factors contributing to the costs of securing legal representation and accessing justice services.

One of the matters considered by the Commission was the way in which civil litigation is currently funded in Australia, including the role of litigation funding companies and the varied regulation of contingency funding and conditional billing throughout Australia.

Commission's view on the litigation funding

Australia has seen rapid growth in the litigation funding market in recent years, particularly in the area of class action litigation.  Whilst established firms in the local market such as Bentham IMF Ltd remain dominant in the industry,  law firms are increasingly investigating the use of varied funding models to fund such claims.

Overall, the Productivity Commission viewed the role of litigation funders in the Australian legal system as a positive one in providing access to justice for plaintiffs who otherwise might not be in a position to seek legal redress.  However the Commission acknowledged that funders currently operated in a limited area being cases with large payouts and relatively low risks and were unlikely to improve access to justice in relation to rights-based, non-monetary claims.  Bentham IMF said in its submission to the Commission that, given its stringent criteria, less than 5 per cent of funding applications it receives are funded.4

The Commission said the suggestion often raised that Australia was becoming as litigious as the United States was unwarranted and that there were checks and balances in place, such as Australia’s loser pays rules, which acted to deter frivolous claims.  However, the Australian Institute of Company Directors expressed concern regarding the impact and disruption this type of complex litigation has on corporations in particular, and the increasing role being played by litigation funders with “little or no regulation”.5

Risks raised before the Commission in relation to the lack of regulation included that:

  • agreements may be struck unfairly (for example by providing unfair commissions to funders) because consumers have limited capacity and experience compared to funders;
  • funders may exercise too much control over proceedings;
  • there may be potential conflicts of interest between funders, plaintiffs and lawyers; and
  • there are no measures to encourage a funder to hold adequate capital relative to its financial obligations.

Regulation of litigation funders

The Commission is in favour of creating a tailored licensing system for litigation funders with oversight responsibilities given to an appropriate regulator. It says the scope of any licensing regime should be determined following a proper consultation process around draft licence conditions.  Whilst it acknowledges that licensing conditions could form a barrier to entry for new players, it sees the recommendations as justifiable to ensure that only reputable and capable funders enter the market.

The Commission recommends that the terms of any licence should:

  • ensure funders hold adequate capital relative to their financial obligations;
  • ensure funders properly inform clients of relevant obligations and systems for managing risks and conflicts of interest; and
  • require litigation funders to be members of the Financial Ombudsman Scheme. 

The Government has already expressed its support for further regulation of litigation funders and announced plans to convene an advisory panel to provide advice to the Attorney General on the future of the federal class action framework.

Damages-based billing for lawyers

Interestingly, the Commission also recommends relaxing the restrictions on damages-based billing for lawyers, subject to striking the right balance for consumer protection.6  

Damages-based billing or contingency funding is where a lawyer receives a percentage of the amount recovered for a client (agreed from the outset of the proceedings) and is not paid if the claim is unsuccessful.  Whilst the practice is currently prohibited for lawyers in all Australian jurisdictions, litigation funders are not prohibited from such billing arrangements.

Damages-based billing can be distinguished from conditional “no-win/no-fee” billing where what is recovered if the claim is successful are the legal fees actually incurred in running the proceedings rather than a percentage of the damages agreed at the outset. 

Given the strong opinions already expressed on this issue by the Federal Attorney General, it appears unlikely that the current Government will implement such a change.