A new report by the Menzies Research Centre has found that the rise in class actions taken on “no win, no fee” bases and underwritten by litigation funders has deprived plaintiffs of a significant share of the damages they’re awarded.
Between 2009 and 2020, 41 class actions backed by litigation funders were settled in Australia for a total of $2.389 billion. From this, lawyers took $341.84 million in fees and charges.
Litigation funders, who effectively gamble on a successful outcome and profit from the money awarded to the plaintiffs, received $642.63 million.
That left plaintiffs almost a billion dollars out of pocket.
At present, litigation funders can quickly launch a class action once they identify a person to be a representative plaintiff, on the understanding that they will likely be able to secure a contingency fee when the case is settled.
When prospective class action claimants believe they are likely to find at least six people with similar claims, they can commence proceedings.
Contingency fees are banned across Australia, except for class actions in the Federal Court and the Victorian Supreme Court.
As a result, those jurisdictions have become a fertile field for litigation funders, of which there are around 22—with 14 being foreign-owned. The sector is dominated by four companies which make around 70 percent of total revenue.
Fast-Growing Industry
Funding lawsuits has become a lucrative investment. From 2019 to 2024, the industry showed a compound annual growth rate of 9.6 percent, reaching an estimated revenue of $199.3 million.That rate of growth is four times more than that of the mining industry.
The Menzies Centre reports that litigation funder Omni Bridgeway made a 205 percent return from one recent class action, while another firm, LCM, made 230 percent.
Similarly, most class actions are brought by a small number of Australia’s thousands of law firms.
Last financial year, just seven firms brought over half of all such cases: Maurice Blackburn (six), Shine Lawyers (four), Phi Finney McDonald (four), Piper Alderman (four), Levitt Robinson (three), Quinn Emanuel (three), and Slater and Gordon (three).
The report noted that conflicts can arise between lawyers, litigation funders, and class members in several circumstances, including if a claim seems like it may not succeed.
No Regulation Following Law Change
Recently, the sector has become less transparent, with the Albanese government undoing reforms that required litigation funders to have an Australian Financial Services Licence.Class action funding is also no longer classified under management investment schemes, which require disclosure documents, thus removing the requirement for litigation funders to reveal their fees and commissions.
Currently, there is no legislation or regulation in Australia that limits the fees that funders can charge.
In one class action, known as “Banksia,” it was found that the funder, Australian Funding Partners Limited (AFPL) and the organising lawyers had overcharged so egregiously that the barristers involved with the scheme were struck off and AFPL was ordered to pay $11.2 million in compensation bill plus around $10 million in costs.
In addition, litigation funders’ need for revenue means that government agencies and corporations are increasingly likely to be sued.
The Menzies Research Centre estimates that an ASX 200 listed company has a one-in-10 chance of having a class action launched against it. The average claim is between $50 million and $75 million.
