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On 9 July 2021, the Australian Securities and Investments Commission (ASIC) issued Consultation Paper 345 – Litigation funding schemes: Guidance and relief (CP 345). CP 345 contains ASIC’s proposed changes aimed at providing greater clarity on the meaning and application of key provisions in the Corporations Act 2001 (Cth) (Corporations Act) to class actions that are litigation funding schemes. It also sets out ASIC’s position in relation to various relief instruments that currently apply to funded class actions.
CP 345 follows the release of the joint consultation paper on 1 June 2021 by Treasury and the Attorney-General’s Department titled Guaranteeing a minimum return of class action proceeds to class members, as well as the Final Report in December 2020 by the Parliamentary Joint Committee on Corporations and Financial Services on its inquiry into litigation funding and the regulation of the class action industry.
CP 345 seeks comments and submissions on ASIC’s proposals to do the following:
Pursuant to the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (Regulations), the following regulatory regime has applied to certain funded class actions since 22 August 2020:
After the Regulations were made, ASIC issued ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 which granted relief to responsible entities of litigation funding schemes from the following:
ASIC proposes to amend RG 248 and RG 166 to provide guidance on the application of the following key definitions:
ASIC asserts that, amongst other things, the definition of ‘managed investment scheme’ will be satisfied in the following circumstances:
According to ASIC, a person will be a member of a scheme if they hold some right (including a right that is prospective, contingent or unenforceable in nature) to a benefit product by the scheme. ASIC considers that lawyers:
ASIC’s view set out in CP 345 is that “scheme property” includes the following:
ASIC proposes to amend RG 166 so that it reflects ASIC’s interpretation of “special custody assets” in the context of litigation funding schemes. Amended RG 166 will also set out the impact of “special custody assets” on the net tangible asset requirements imposed on AFS licensees that operate registered managed investment schemes.
According to ASIC, the following are special custody assets:
Pursuant to subsection 601FC(1)(d) of the Corporations Act, responsible entities must treat members, who hold interests of the same class, equally when exercising their powers and carrying out their duties (Equal Treatment Rule). ASIC proposes to provide industry-wide relief from this requirement to enable a responsible entity to distribute to general members settlement sums obtained in class actions, provided the distribution is consistent with the constitution of the scheme and any orders or determinations made by the Court or a court-appointed resolution administrator. The relief is proposed not to apply to any other aspect of the conduct of the class action or the operation of the scheme generally.
The Corporations Act requires various costs, fees, charges, expenses, benefits and interests to be stated as dollar amounts in a PDS for the scheme, subject to certain exceptions.
In April 2021, ASIC issued ASIC Corporations (Amendment) Instrument 2021/292 (ASIC Instrument 2021/292). ASIC Instrument 2021/292 provides interim relief for a period of 12 months from the requirement to disclose the relevant information in dollar amounts in a PDS issued for a registered litigation funding scheme.
ASIC is aware that, as a PDS is a public document, it is impracticable to include dollar amounts in connection with litigation funding schemes which may have ‘adverse strategic implications’. Taking this into account, ASIC proposes to provide relief from these disclosure requirements, subject to the following conditions that are aimed at ensuring members of litigation funding schemes receive the requisite information:
ASIC proposes not to renew the temporary relief provided by ASIC Instrument 2020/37 that enables the operation of litigation funding arrangements and proof of debt funding arrangements without complying with the National Credit Code at Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth).
ASIC also proposes not to renew the temporary relief provided by ASIC Instrument 2020/38 that enables the operation of conditional cost schemes, i.e. litigation funding schemes or proof of debt funding schemes that are funded under a conditional costs agreement, without the requirement to comply with the managed investment scheme requirements under Chapter 5C and the AFS licensing and disclosure requirements under Chapter 7 of the Corporations Act.
Depending on one’s interpretation of the definition of “litigation funding scheme” and the circumstances of a particular class action, this could have implications for law firms conducting class actions on a conditional or contingent costs basis. In proposing not to renew this relief, ASIC referred to the findings of the Senate Standing Committee for the Scrutiny of Delegated Legislation as well as Treasury’s intention to change the regulatory regime that applies to litigation funding schemes.
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