New Laws Give Class Action Claimants a Better Chance at Higher Compensation

May 22, 2020 Updated: May 25, 2020

Treasurer Josh Frydenberg has tightened the screws on third-party litigation funders, introducing new laws to increase regulation and address issues where plaintiffs are receiving a low portion of successful compensation claims.

Funders will now need to hold an Australian Financial Services Licence which will put them in the same class as banks and other lenders, subjecting them to stricter rules around transparency and accountability, and bring them under the gambit of the Australian Securities and Investments Commission (ASIC).

Frydenberg said he was concerned with the number of class actions tripling in recent years.

“It is now even more important that litigation funding activities are regulated in a manner that is consistent with other financial services and products that seek to provide investment returns to consumers,” he told AAP on May 22.

“There is no reasonable basis for litigation funders to continue to be exempt from the same regulation that applies to the entities which they seek to litigate against.”

Litigation funding is often used in class actions involving compensation claims. Plaintiffs who cannot afford to fund an action can obtain funding from a third-party organisation. Some of the largest litigation funders include IMF Bentham, an ASX listed company.

The practice in recent years has seen the number of class actions increase dramatically. Plaintiffs have also complained of receiving only a fraction of compensation if an action is successful, with much of the money going to litigation funders, lawyers, and administrators.

On March 5, the Parliamentary Joint Committee on Corporations and Financial Services was tasked with looking into this area.

Attorney-General Christian Porter said that while litigation funders had an important role to play in the legal system, however “aggressive business” practices were impacting plaintiffs, and the situation was “clearly wrong.”

“To quote Judges who’ve presided over cases involving litigation funders, the profits they make have been variously described as ‘stratospheric’, ‘arguably excessive’ and ‘not fair and reasonable,’” the Attorney-General said.

“I am even aware of a case where a group of workers who were suing their employer for unpaid entitlements did not receive a single cent from a $5 million dollar judgement awarded in their favour,” he said.

“Instead, the litigation funder walked away with almost $2 million and the remainder was shared between lawyers and administrators.”

The Australian Institute of Company Directors welcomed the treasurer’s move saying the rules helped guard against “opportunistic” class actions.

“This government step comes at a time when business leaders are working hard to save jobs and companies from collapse,” chief executive Angus Armour said in a statement on May 22.

“They do not need to be looking over their shoulders for lawyers and funders looking to capitalise on the uncertainty created by the pandemic,” he said.

Armour said the upcoming parliamentary inquiry was an opportunity to look into how the system was operating and whether changes were needed.

Meanwhile, national compensation law firm Slater and Gordon announced it reached a $95 million settlement in a class action on behalf of shareholders of Spotless Group.

The class action against Spotless alleged the group misled the market through announcements made in late 2015.

The case was co-funded by three litigation funders.