The NSW Court of Appeal by a majority had previously held that a funding agreement in relation to a litigation funding arrangement was a financial product. The majority rejected the argument that such an agreement was a credit facility which meant that it was not specifically excluded from being a financial product.
However the High Court has sensibly unanimously held that such an agreement is a credit facility because it is a form of financial accommodation. Since this finding meant the funding agreement was specifically excluded from being a financial product, the Court did not have to consider other arguments as to whether or not it was a financial product because it was a derivative or because it managed financial risk.
The effect of the High Court decision is that a funding agreement, at least where there is a single claimant, is not a financial product. This means that the funder is not carrying on a financial services business by providing entering into such a funding agreement and therefore does not require an Australian financial services licence.
However litigation funding arrangements for litigation involving more than one claimant have previously been held to be a managed investment scheme by the Full Court of the Federal Court. The initial impact of this decision was to characterise funded class actions as financial products because interests in managed investment schemes (save in the case of a one-off 20 person only scheme) are specifically included as being a financial product.
However, in light of the High Court decision, this decision has an added consequence of meaning that a funded class action cannot be a credit facility because managed investment schemes are specifically excluded from being characterised as credit facilities.
There is class order relief currently in effect and after 13 January 2013 there will be a regulation in force that will deal with these types of schemes. The class order and the regulation exclude these arrangements from the definition of a managed investment scheme. There are exemptions also given in relation to the licensing requirements.
However, as a condition of the relief from the licensing requirements, the new regulations require the funder to have adequate arrangements in place for managing any conflict of interest. As stated above, the High Court decision does not affect the new regulations and the obligation to have adequate arrangements for managing conflicts of interest. Funders who wish to rely on the exemptions from the licensing requirements will therefore need to put in place adequate arrangements for managing conflicts of interest by 13 January 2013.
A consultation paper issued by ASIC earlier this year indicates that whilst funders (and lawyers) will be responsible for determining their own arrangements to manage conflicts of interest they will be required to demonstrate such arrangements, through for example documenting, implementing, monitoring and reviewing these arrangements. ASIC is due to release a regulatory guide in December 2012 which will provide further guidance in relation to these new obligations.
The High Court decision also removes any argument that was available after the NSW Court of Appeal decision, that a funding agreement for a single claimant is not a financial supply. Therefore is now clear that funding agreements is a financial supply and therefore an input taxed supply for GST purposes