Litigation funding regulation

Articles Written by Austin Bell (Partner)

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:

  • third party litigation funders of “litigation funding schemes” will need to obtain an AFSL in order to deal in, or provide financial product advice in relation to, an interest in a litigation funding scheme, unless an exemption applies – an exemption could apply if the litigation funder were authorised under another person’s AFSL with the requisite authorisations;
  • “litigation funding schemes” that are required to be registered under Chapter 5C of the Corporations Act will need to be operated by a “responsible entity” – ie a public company that holds an AFSL with the authorisation to operate the scheme;
  • the anti-hawking provisions will apply to interests in “litigation funding schemes”; and
  • Part 7.9 of the Corporations Act will apply in relation to interests in “litigation funding schemes” – this will require “general members” of the scheme to be given a product disclosure statement (PDS) and periodic statements.  A “general member” is, effectively, a person that has an “interest” in the scheme, other than a funder or a lawyer providing services for the purposes of the scheme.

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.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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