The rules around class action lawsuits need to change, according to a review by the Samuel Griffith Society.
The Society says much of the $1 billion in settlement funds paid in the 2019/20 financial year went to private underwriters and law firms.
The Society was established in 1992 and focuses on researching constitutional issues.
The authors, Xavier Boffa and Henry Davis, said litigation funding—where a specialised finance company effectively gambles on plaintiffs winning a case by paying for the legal fees and other costs—was developed to ensure that a lack of money would be no barrier to justice for potential plaintiffs.
But now the “scales have tipped far too far in favour of the interests of litigation funders and, potentially, plaintiff law firms,” the report says.
Litigation Funding Eating into Compensation Sums
There is little doubt that, while it might provide greater access to the courts, litigation funding results in smaller wins for the plaintiffs.
In Australian class actions supported by third-party funding, the average commission is 25 percent and costs come to 21 percent, which is deducted from whatever sum a plaintiff wins in court.
A 2019 inquiry by the Australia Law Reform Commission found that in most class actions where members received less than 50 percent of the settlement amount, the case had been underwritten by a litigation funder.
Victoria a Hotbed of Legal Activity
A 2020 law change making it even easier for class actions to receive litigation funding saw an “explosion” of cases in Victoria, the report notes.By the end of the 2022/23 financial year, nearly 36 percent of all class action litigation in Australia was filed in the Victorian Supreme Court, up from 6.9 percent in the 2018/19 financial year.
Federal Court rules also allow for class actions to be underwritten by litigation funders, resulting in Australia becoming one of the largest jurisdictions for classes globally after the United States.
In July this year, the Federal Court extended the availability of contingency fees to both litigation funders and, for the first time, law firms, mirroring the Victorian model. That decision is currently subject to an appeal in the High Court.
“The large profits obtained by litigation funders clearly limit ‘access to justice’ in a broader sense,” the report’s authors say.
Recommendations For Reform
An alternative to commercial litigation funders is statutory funds at either a federal level or state level, first mooted by the Australian Law Reform Commission in 1988.Instead, it suggests the complete removal of the contingency fee model in Victoria and a review of civil procedure rules that permit contingency fees in the Federal Court, along with “a strict regime of regulation of third-party litigation funders, including disclosure of the source of funding.”
It also suggests reversing the Albanese government’s lifting of regulation on litigation funders imposed by the then-Coalition government, calling the decision “problematic.”
The report quotes the Australian Securities and Investment Commission (ASIC), as saying that currently, “Litigation funding arrangements are generally exempt from the managed investment scheme, Australian financial services licensing, product disclosure and anti-hawking regimes in the Corporations Act 2001.”
Boffa and Davis believe litigation funders should be required to hold Australian Financial Services Licences and be regulated by ASIC, as it does other financial institutions, and that litigation funding schemes should be classed as managed investment schemes within the Corporations Act.
They also recommend reinstatement of other regulations including those that required litigation financers to participate in anti-money laundering reporting.
The current regime has encouraged “the increasing commercialisation of class action lawfare,” the report’s authors say, and that there needs to be “greater transparency and greater clarity” over the ability of litigation funders ability to influence decisions in the cases they underwrite.
