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The Corporations Amendment (Litigation Funding) Regulations 2020 (Regulations) were published on 23 July 2020. A copy of them and the Explanatory Statement is available here. The Regulations give effect to the Australian Government’s announcement on 22 May 2020 that litigation funders would be required to hold an Australian Financial Services Licence (AFSL) and comply with the regulatory regime applicable to managed investment schemes (MIS).
The Regulations are effective from 24 July 2020 and mean that litigation funders will be subject to the AFSL and MIS regulatory regimes for “litigation funding schemes” (see the end of this note for a complete definition). The new regulatory regimes will begin to apply from 22 August 2020, unless the litigation funding scheme was entered into prior to 22 August 2020 (Pre 22 August 2020 Schemes). The Regulations contain transitional provisions that exempt Pre 22 August 2020 Schemes from the AFSL and MIS regulatory regimes.
The Regulations also preserve the exemptions that currently apply to certain litigation funding schemes in the insolvency context and litigation funding arrangements which are used in actions involving a single plaintiff.
The Regulations mean that:
The Explanatory Statement released with the Regulations states that “[t]he Australian Securities and Investments Commission (ASIC) may need to consider whether it is appropriate for exemptions and modifications to be granted under an ASIC instrument to supplement these changes and manage transition issues”.
Given the extent of the mismatch between the AFSL and MIS regulatory regimes and “litigation funding schemes”, ASIC exemptions and modifications are likely to be numerous. Indeed, while the Regulations shed some light on the kinds of schemes that will become regulated, many unanswered questions remain about how aspects of the AFSL and MIS regimes will apply to litigation funding schemes.
A “litigation funding scheme” is a scheme that has all of the following features:
(a) the dominant purpose of the scheme is for each of its general members to seek remedies to which the general member may be legally entitled;
(b) the possible entitlement of each of its general members to remedies arises out of:
(i) the same, similar or related transactions or circumstances that give rise to a common issue of law or fact; or
(ii) different transactions or circumstances but the claims of the general members can be appropriately dealt with together;
(c) the possible entitlement of each of its general members to remedies relates to transactions or circumstances that occurred before or after the first funding agreement (dealing with any issue of interests in the scheme) is finalised;
(d) the steps taken to seek remedies for each of its general members include a lawyer providing services in relation to:
(i) making a demand for payment in relation to a claim; or
(ii) lodging a proof of debt; or
(iii) commencing or undertaking legal proceedings; or
(iv) investigating a potential or actual claim; or
(v) negotiating a settlement of a claim; or
(vi) administering a deed of settlement or scheme of settlement relating to a claim;
(e) a person (the funder) provides funds, indemnities or both under a funding agreement (including an agreement under which no fee is payable to the funder or lawyer if the scheme is not successful in seeking remedies) to enable the general members of the scheme to seek remedies;
(f) the funder is not a lawyer or legal practice that provides a service for which some or all of the fees, disbursements or both are payable only on success.
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