The final report tabled Monday by the Parliamentary Joint Committee on Corporations and Financial Services makes 31 recommendations to the Morrison government for reforming the class action system, which its says is generating “enormous profits” for the litigation funding industry.

“Australia’s highly unique and favourably regulated litigation funding market has become a global hotspot for international investors, including many based in tax havens and with dubious corporate histories, to generate investment returns unheard of in any other jurisdiction – in some cases of more than 500 per cent. This is directly the result of a regulatory regime described by the Australian Securities and Investments Commission as ‘light touch’ and under which nosuccessful action by a regulator has ever been taken against a funder,” committee chairman Senator James Patterson said.

“The committee considers the concerns about the class action and litigation funding industries to be wellfounded. In the committee’s view, the class action system needs to be reformed to reflect the underlying tenets of its original intent: that is, to deliver reasonable, proportionate and fair access to justice in the best interests of class members.”

Regulating litigation funding agreements

One of the most significant recommendations by the committee would amend the Federal Court of Australia Act to allow the court to reject, vary or amend the terms of any litigation funding agreement if it found that the interests of justice required its intervention.

Funding agreements would need approval by the court to be enforceable under the proposal, which would give the court extraordinary powers to meddle in the contractual relationship between a funder and class action plaintiffs.

While the court is empowered to reject a settlement if it believes the funder’s commission is excessive, judges have limited power to alter funder’s contracts with plaintiffs and group members.

“Greater oversight by, and interventionist powers for, the Federal Court are required to constrain the large portions of settlement sums that are obtained by litigation funders by way of reimbursement of fees and commissions,” the committee’s  report said.

These expanded powers for the court to regulate litigation funding fees would “complement” the financial servies regulation of funders that was put in place in August, the report said.

“Critical to this reform is assistance from financial experts to assist the Federal Court in ensuring that fees are reasonable, proportionate and fair. Increased transparency through appropriately measured public disclosure of transaction costs and division of a settlement would also aid in achieving this objective,” the report said.

The committee recommended the government investigate how to implement a proposal by some class action law firms and litigation funders to guarantee group members receive a minimum return of at least 70 per cent of the gross proceeds of a class action settlement or judgment.

“The committee also recommends the Australian Government investigate whether a graduated minimum return above this floor is appropriate for shorter, less risky and less complex cases,” it said.

Making continuous disclosure law changes permanent

The temporary amendments to remove the strict liability requirement in continuous disclosure laws that were introdued in May amid the COVID-19 pandemic should be made permanent, the committee suggests. This move, it said, would raise the bar to bringing shareholder class actions.

“Given the apparent detriment caused by the increased prevalence of private litigant shareholder class actions, and the apparent lack of any accompanying public good, the committee considers reforms to the underlying substantive law on continuous disclosure are necessary,” the committee said.

Under the amendments, announced by Treasurer Josh Frydenberg in May and now extended to March 23, 2021, companies and officers are liable for continuous disclosure breaches only if there has been “knowledge, recklessness or negligence” in updating the market with price sensitive information.

The committee said retaining the fault element would bring Australia in line with other jurisdictions and combat “opportunistic” shareholder class actions.

“It is clear to the committee that a balance needs to be struck. Market transparency and integrity is obviously fundamentally important. However, a plethora of economically inefficient shareholder class actions is having a detrimental effect on business,” the report said.

Managing competing class actions

A number of recommendations were aimed at giving the Federal Court greater oversight of competing class actions, including introducing an express power to resolve the issue of multiple class actions and requiring judges to hold a selection hearing to pick which class action or actions should proceed. The court would also be required to order a 90-day standstill period following the filing of the first proceeding to allow any other competing class action to be brought.

The committee also recommended limiting shareholder class actions to the Federal Court to prevent the problems of law firms filing competing shareholder class actions in different jurisdictions.

“This reform would also eliminate the possibility of law firms running shareholder class actions on a contingency fee basis,” noted the committee, which recommended lawyers who run class actions on a contingency fee basis in Victoria be subject to the same tougher regulations imposed on funders in August. The aim, the committee said, was to ensure a “consistent regulatory approach to the activity of financing class actions”.

ASIC’s flexible approach to the new regulatory scheme for funders should continue, the committee said, and small not-for-profit litigation funders that only occasionally finance class actions for the benefit of their members, should be given an exemption from the rules, the committee said.

Allowing courts to make class closure orders

Under the committee’s proposals, which would undermine recent case law, the Federal Court would also be empowered to close a class action to group members who had registered to be part of the case.

This recommendation sought to “strike a balance” between protecting class members’ rights and facilitating “reasonable, proportionate and fair resolutions to class actions through settlement”, the committee said.

“The Federal Court’s ability to close the class is integral to facilitating settlements in open class actions and upholding the objective of the class action regime to provide the respondent with the benefit of finality with respect to the dispute.”

The court has used the broad power in section 33ZF of the FCA Act to make class closure orders, but a ruling in the NSW Supreme Court in a case known as Hazelhurst put the court’s power in doubt.

The express power recommended by the committe, which would be introduced by amendment to Part IVA of the FCA, would be modelled on section 33ZG of Victoria’s Supreme Court Act. The criteria for the Federal Court to apply when determining whether to close the class or re-open the class would be set out in the court’s class actions practice note.

Keeping the federal ban on contingency fees

While other recent inquiries have support lifitng the ban on lawyers charging contingency fees in class actions, the committee said it considered the benefits were outweighed by the potential for their exploitation, even with safeguards.

“The committee is not persuaded that the ability of lawyers to bill representative plaintiffs and class members on
a contingency fee basis would lead to reasonable, proportionate and fair outcomes,” the report said.

“Contingency fees create too great a risk that lawyers could compromise their ethical and professional obligations to the court and to the client if they have a direct financial interest in the outcome. While the committee recognises
there is the potential for conflicts of interest in ‘no win, no fee’ arrangements, contingency fees exacerbate this potential for conflict by virtue of the windfall profits that could be made from percentage-based fees.”

Arguments that contingency fees would improve access to justice were overstated, according to the committee, which said only a few law firms would have access to sufficient capital to take on the risk of competing with litigation funders for cases.

Other recommendations include legislation to address what the committee said was “uncertainty” over the power of courts to issue common fund orders, with the statutory change to fall in line with the High Court’s decision in the Brewster case to nix the orders; and requiring a litigation funder to provide security for costs in class actions and wholly indemnify group members for adverse costs.

The committee also suggested the expanded use of contradictors during the class action settlement approval phase of a case to protect class members against excessive legal costs and commission.

“To the committee’s knowledge, in instances where a contradictor has been appointed, this has been an effective mechanism to represent the interests of class members by robustly scrutinising the distribution of settlement sums between class members, lawyers and litigation funders. This has resulted in settlement agreements which are more financially advantageous for class members than when first proposed to the Federal Court for approval,” the committee said.

The report was released just nine months after Attorney General Christian Porter announced the committee would conduct an inquiry into Australia’s class action regime, the fourth inquiry in six years.

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