Despite a federal government amendment that left the litigation funding market “unregulated” earlier this year, the Australian Securities and Investments Commission (ASIC) has indicated the investment class is on its radar.
The regulator yesterday released guidance on managing conflicts of interest in litigation funding, a controversial practice whereby class action court disputes are funded by third party financiers, largely on behalf of institutional investors.
In a statement accompanying the release of Regulatory Guide 248 Litigation schemes and proof of debt schemes, ASIC commissioner John Price said some aspects of the third party funding space warrant close attention from the regulator.
“A key factor in the increase in class action filings has been the emergence of commercial litigation funding,” he said.
“Class actions can provide access to justice for a large number of consumers who may otherwise have difficulty in resolving disputes.
“But there is also an inherent tension in these types of schemes between the interests of the funders, liquidators, lawyers and participating members.
“Our guidance about the recent law changes in this area helps in the protection of members by setting out expectations of what is required to satisfy the obligation to maintain adequate practices and follow certain procedures for managing any conflicts.”
The regulation outlines procedures for disclosure of conflicts of interest, funding agreements in place and prior approval of terms of settlement, and also applies to insolvency practitioners and lawyers involved in proof of debt schemes.
ASIC’s release of guidance follows the enactment of the federal government’s Corporations Amendment Regulation 2012 (No.6) in February, which, according to an advisory document penned by Allens partners Ross Drinnan and Jenny Campbell, “effectively exempt litigation funding from all forms of regulation”.
The regulation confirmed the government’s position that litigation funding is not a managed investment scheme – counter to a 2009 Federal Court ruling – and that litigation funders should therefore not be subject to Australian Financial Services Licences.
However, despite the seemingly unambiguous policy stance of the government in its amendment, Mr Drinnan and Ms Campbell predicted the emergence of further regulatory guidance.
“We doubt that we have heard the final word on the regulation of litigation funding – even if the scope for further legal challenge is limited, policy issues remain and are likely to be revisited at some stage in the future,” they wrote.
“Nor do we think that we have heard the final word on the scope and reach of litigation funding in Australian proceedings.”
