Submission to Parliamentary Joint Committee on Corporations and Financial Services
Inquiry into Litigation Funding and the Regulation of the Class Action Industry
Executive summary:
Phi Finney McDonald is a newly-established commercial law firm that specialises in class actions and complex litigation. We represent a diverse group of clients and, as a new firm, can offer the Committee a different perspective to some of the more generalised commentaries that have recently been reported about class actions.
This submission shows that increasing competition and growing innovation in the litigation funding market are providing greater choices for consumers and driving down prices.
Prior to 2018, a lack of competition meant that class action group members were paying up to 40 percent of their damages in litigation funding commissions. These commissions have fallen dramatically as a result of competition. For example, in the BHP class action that Phi Finney McDonald is conducting, group members are guaranteed to receive 85 percent of gross litigation proceeds up to $100 million and 90 percent of proceeds above $100 million. We actively work on behalf of our clients to ensure that they receive litigation funding on the best available commercial terms. We know from experience that this is not possible in a less competitive market, and we are greatly concerned that the central thrust of the Government’s reform agenda appears to be to regulate litigation funders in a manner that will reduce competition and increase costs to our clients.
Class actions are not the product of ‘lawfare activists’ engaged in ideological claims. Nor are class action defendants merely innocent businesses being treated unfairly for trivial oversights. Class action group members are certainly not ‘investors’ in a Managed Investment Scheme pooling their resources to make a profit.
Outside the submissions of the business lobby, there is a broad consensus that the class actions brought in Australia are meritorious. Indeed, even the Australian Institute of Company Directors (AICD) supports class actions as ‘critical’ in providing access to justice. They only dislike those class actions that affect their own members.
Many class action group members are the quiet Australians this Government says ‘have a go’ and who ‘deserve a go.’ They have suffered loss and damage from often egregious conduct by some of the most powerful institutions in the country, and class actions are their only avenue for redress. They include:
• Farmers, like those impacted by a former government decision on live exports; • Small businesses such as those in the Michel’s Patisserie franchisee case, adversely impacted by the actions of a large business that even a Parliamentary Joint Committee found was guilty of ‘exploitative fee-gouging’ of franchisees; • Mum and Dad investors and self-managed superannuants like those disadvantaged in the Westpac case; • Innocent landowners whose property was contaminated by years of PFAS use by a government agency; • Policy holders, mortgagors and other victims identified by the Hayne Royal Commission.
Importantly, the Australian Law Reform Commission (ALRC) has confirmed that class actions make up just 0.68 percent of cases filed in the Federal Court each year. There is simply no basis to for suggestions that there has been some explosion of case numbers, let alone an increase that would justify providing dispensations to large corporations that absolve them from legal liability.
In our submission the reforms being proposed are disproportionate, would increase costs for class action claimants, and would have a detrimental effect on our financial markets. Some of these reforms would protect large and well-resourced entities from facing the consequences of egregious misconduct. The Hayne Royal Commission demonstrated that large entities should be subjected to greater accountability not less, and ASIC has been consistent in praising class actions for enforcing greater compliance. Indeed, it is the active level of ‘private enforcement’ in shareholder class actions that allows ASIC to direct its finite public resources to other higher priority areas.
Our view is also supported by a number of experts who considered these issues in detail:
• The High Court was unequivocal in its conclusion that the types of agreements commonly entered into between class action plaintiffs and litigation funders in Australia are not contrary to public policy.
• The ALRC, the Victorian Law Reform Commission (VLRC), the Productivity Commission and counterpart organisations in the United Kingdom have confirmed that class actions deliver access to justice for plaintiffs with meritorious claims who would otherwise be unable to afford to pursue a remedy.
As ASIC has forcefully argued, watering down continuous disclosure obligations could undermine the integrity of Australia’s financial markets and permanently damage the Australian economy.
Finally, in our submission the Australian Financial Services License (AFSL) and Managed Investment Scheme (MIS) regulatory regimes are clearly not fit for purpose. The increased compliance costs and regulatory burden could force smaller and less well established law firms and litigation funders out of the market and gains for consumers achieved through competition and innovation will be lost.
Litigation funding behemoth Litigation Capital Management has publicly boasted to its investors that it will benefit from the Treasurer’s plans to impose AFSL and MIS requirements because the added regulatory costs and barriers to entry will reduce competition.
The ultimate losers of these reforms will not be litigation funders. The losers will be consumers who will have to pay more to the litigation funders that remain. The winners will be the large plaintiff law firms and large litigation funders whose market dominance will only increase.
Phi Finney McDonald believes that in the wake of the Hayne Royal Commission, the case simply hasn’t been made that the largest, most well resourced companies should get more relief from scrutiny where they harm somebody, and that the issues regarding class actions and litigation funding have been well canvassed previously. The risks of decreased competition and increased costs of some proposed changes runs counter to the public benefit of class actions at the expense of many small business, small shareholders and other individuals’ right to an affordable day in Court – noting that far from an explosion of cases, class actions represent just 0.68 per cent of cases before the Federal Court.
Recommendations:
The Committee should:
• Support the ALRC’s recommendations; • Reject proposals to apply the AFSL and MIS regulatory regimes to class actions and litigation funding; • Reject the AICD’s proposals to permanently water-down continuous disclosure obligations and prohibiions on misleading or deceptive conduct; • Reject proposals to ‘nationalise’ class actions by requiring ASIC to divert public resources to work that is being done by the private sector in a highly competitive market and with reducing costs to consumers. ASIC should be permitted to focus on other equally important activities such as implementing the already delayed recommendations of the Hayne Royal Commission.
1. Class actions are delivering fair and equitable outcomes for plaintiffs
Terms of Reference:
Whether the present level of regulation applying to Australia’s growing class action industry is impacting fair and equitable outcomes for plaintiffs.
It is “beyond doubt” that class actions are delivering access to justice
1.1. In its recent report, the ALRC concluded it was ‘beyond doubt’ that the Federal class actions regime has empowered those who had suffered loss or damage to seek justice, and to do so more cheaply and efficiently than if they had been left to fend for themselves:
…it is beyond doubt that, as was intended, the regime has enabled claims to be brought by people with small claims whose number may be such as to make the total amount at issue significant, and to deal efficiently with similar individual claims that are large enough to justify individual actions (our emphasis).1
1.2. As the Chief Justice of the Federal Court of Australia, Chief Justice the Hon James Allsop AO has observed,2 the Federal class actions regime was established pursuant to an earlier inquiry and report of the ALRC, which was tabled in the Federal Parliament in December 1988.3
1 Australian Law Reform Commission, ‘Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders, Report 134’ (December 2018) [1.23]. 2 Chief Justice JLB Allsop AO, ‘Class Actions’ (Speech, Law Council of Australia, 13 October 2016). 3 Australian Law Reform Commission, ‘Grouped Proceedings in the Federal Court, Report 46’ (December 1988). 1.3. The Federal class actions regime was established by inserting Part IVA into the Federal Court of Australia Act 1976 (FCA Act) in March 1992. In his second reading speech, then Attorney-General the Hon Michael Duffy MP explained the purpose of class actions was to:
…enhance access to justice, reduce the costs of proceedings and promote efficiency in the use of court resources…Such a procedure is needed for two purposes. The first is to provide a real remedy where, although many people are affected and the total amount at issue is significant, each person’s loss is small and not economically viable to recover in individual actions. It will thus give access to the courts to those in the community who have been effectively denied justice because of the high cost of taking action. The second purpose of the Bill is to deal with the situation where damages sought by each claimant are large enough to justify individual actions and a large number of persons wish to sue the respondent. The new procedure will mean that groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, will be able to obtain redress and so more cheaply and efficiently than would be the case with individual actions (our emphasis).4
1.4. The amendment was not passed without concern. The Former Attorney-General, Senator the Hon Peter Durack QC, raised concerns about the regime during debate in the Senate, remarking that a ‘number of people would even go so far as to say that [the legislation] is a monstrosity’ and describing class actions as ‘one of those rather loopy proposals that come up from time to time from commissions like the Law Reform Commission’.5
1.5. As the ALRC has observed, these fears have not materialised, and the Federal class actions regime is operating successfully and efficiently, as originally intended:
As was intended, the regime has provided a remedy where, although many people are affected and the total amount at issue is significant, each person’s claim is small, and to deal efficiently with similar individual claims that would nevertheless be large enough to justify individual actions (our emphasis).6
4 Commonwealth, Parliamentary Debates, House of Representatives, 14 November 1991, 3174-3175 (Duffy). 5 Commonwealth, Parliamentary Debates, Senate, 13 November 1991, 3019 (Durack). 6 Australian Law Reform Commission, above n 1, [2.6]. Class actions perform a public good
1.6. As the ALRC (and the AICD) has recognised, class actions perform a broad public good. They provide a mechanism through which broader regulatory policies can be vindicated. These are policies which protect the community from harm, such as laws which protect shareholders and the integrity of the market by penalising failures to disclose price sensitive information to the securities exchange, which prohibit anti-competitive conduct, or that ensure the safety of pharmaceuticals and medical devices:
The class action regime that was created by Part IVA of the FCA Act is different in character from other forms of civil litigation. Class actions are not simply disputes between private parties about private rights. They frequently perform a public function by being employed to vindicate broader statutory policies such as disclosure to the securities market, prohibiting cartels or fostering safe pharmaceuticals (our emphasis).7
1.7. As the ALRC has recognised, the Federal class actions regime has allowed vindication of ‘a broad range of both commercial and non-commercial causes of action including shareholder and investor claims, anti-cartel claims, mass tort claims and consumer claims for contravention of consumer protection law’.8
1.8. The empirical data relating to the types of class actions filed in the Federal Court shows that their primary beneficiaries are ordinary Australians. For example, between 2013 and 2018 the majority of class actions filed in the Federal Court were shareholder class actions.9 A significant number of plaintiffs participating in shareholder class actions are ‘retail investors’,10 such as ‘Mum and Dad’ investors who hold direct shares in their Self- Managed Super Funds and self-funded retirees who rely on company dividends to fund their retirement. As Justice Beach of the Federal Court explained in the Newcrest class action, ‘Mum and Dad’ type investors are particularly susceptible to the very real harm caused when companies fail to disclose price sensitive data to the market, because they lack the ‘information advantages’ available to large, well resourced institutional investors:
First, true it is that at least 80% of Newcrest shares at the relevant time were held by institutional investors. But if one considers the number of shareholders, and those who are group members depending upon their trading position over
7 Ibid [1.47]. 8 Ibid [2.6]. 9 Ibid [Table 3.3]. 10 Earglow Pty Ltd v Newcrest Mining Ltd [2015] FCA 328, [72] (Beach J). the relevant time window from which the number of claims can be derived, a different and more relevant picture emerges.
…as the applicant has contended, the data reveals that the vast majority of actual and potential Newcrest shareholders held, or would have been expected to buy, small parcels of Newcrest shares, and were unlikely to have at their disposal the “information advantages” available to an institutional investor… In fact, when one looks at shareholders and claims, the applicant [a retail investor] is more representative than any institutional investor (our emphasis).11
1.9. The Federal class actions regime has provided access to justice for Australians from all walks of life, including Australians operating small and family businesses. For example, on 14 June 2019 commercial law firm Corrs Chambers Westgarth announced plans for a class action against the ASX-listed Retail Food Group (RFG) on behalf of franchisees in the Michel’s Patisserie chain.12 The class action, to be funded by litigation funder Augusta, accuses RFG of engaging in unconscionable conduct that resulted in devastating losses for hundreds of small business people.12 A subsequent inquiry by the Parliamentary Joint Committee on Corporations and Financial Servcies found that RFG was guilty of ‘exploitative fee-gouging’ of franchisees and a business model which ‘relied on extracting profits from its franchise systems with hugely deleterious results for franchisees’.13 Between 2013 and 2018 several class actions were filed in the Federal Court on behalf of franchisees, agents and distributors.14
1.10. The Federal class actions regime has provided access to justice for Australians from all parts of the Federation, including primary producers in regional Australia. On 2 June 2020 the Federal Court of Australia ruled in favour of the family-owned Brett Cattle Company, who were the lead plaintiffs in a class action brought against the Federal Government to recover loss and damage suffered as a result of the 2011 decision to ban live cattle exports.15 Commercial law firm Minter Ellison represented the plaintiffs. The class action was funded by the Australian Farmers Fighting Fund, a specialist litigation funder which
11 Ibid [70] – [72]. 12 Adele Ferguson, ‘'I'm a caterpillar, RFG is a dragon. I can take them down': ex-Michel's owner fights back’, Sydney Morning Herald (Sydney), 15 June 2019. 12 Ibid. 13 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, The operation and effectiveness of the Franchising Code of Conduct (2019) [4.64]. 14 Australian LRC Report 134 [Table 3.3]. 15 Brett Cattle Company Pty Ltd v Minister for Agriculture [2020] FCA 732. ‘provides funding for nationally significant legal cases that defend farmers' way of life’.16 The decision paves the way for hundreds of primary producers from across Northern Australia to obtain compensation from the Federal Government, with a total estimated value of around $600 million. 17
1.11. It is notable that, in their submission to this Inquiry, even the AICD supports class actions in most cases, and acknowledges that they facilitate access to justice. The only cases that the AICD does not like are those that do not suit their members’ self-interest:
The AICD strongly believes that Australia’s securities class action market requires reform...
We also recognise the critical role that class actions play in facilitating access to justice in other areas of the law, such as product liability and environment cases (our emphasis).18
1.12. The AICD’s proposals should be viewed for what they are – intended to relieve their members from having to comply with laws that are essential to the efficiency and transparency of Australia’s financial markets.
1.13. This Committee’s Terms of Reference express concern for consumers, and allege that litigation funders are charging too much. However, the licencing regulations proposed by the Treasurer and championed by the AICD and their ilk will make litigation funding more expensive. This reform agenda will also create a series of other perverse and unintended consequences, that will harm a broad range of constituents.
1.14. These reforms will not help consumers. They will benefit the very narrow interests of AICD members, and will do so at the expense of ordinary Australians and the financial markets into which they all invest. It is also important to keep the ‘mischief’ of which the AICD complains of in perspective, reiterating that class actions represent just 0.68 percent of all cases before the Federal Court.
16 Australian Farmers’ Fighting Fund, Live Export Shutdown Class Action (July 2020)
1.16. The ‘reform’ proposals being advanced would see a massive regulatory sledge hammer being used, under false pretenses, to crack an illusory policy acorn that has been conjured up by self-interested business lobby groups, against the repeated recommendations of independent commissions, policy experts, and the intended regulator.
2. Competition is putting downward pressure on prices and delivering better outcomes for consumers
Terms of Reference:
What evidence is available regarding the quantum of fees, costs and commissions earned by litigation funders and the treatment of that income.
Competition is growing
2.1. The evidence demonstrates that steadily increasing competition and innovation in the class actions and litigation funding market are squeezing margins for class action law firms and litigation funders and putting downward pressure on prices charged to consumers. For example, in the BHP class action that Phi Finney McDonald is conducting, group members are guaranteed to keep 85 percent of gross litigation proceeds up to $100 million and 90 percent of proceeds above $100 million.
2.2. Historically, class actions were run by a concentrated pool of law firms and funded by a concentrated pool of litigation funders. Professor Morabito of Monash University observed that from the inception of the Federal class actions regime Maurice Blackburn and Slater and Gordon had established themselves as the largest players in the market,19 with IMF Bentham (now Omni Bridgeway) the main litigation funder.20
2.3. However, increasing competition in relation to class actions and litigation funding is challenging the dominance of established players. In particular, competition is transforming the profile of class action law firms, from one dominated by ‘traditional’ plaintff law firms such as Maurice Blackburn and Slater and Gordon to one which features commercial law firms such as Corrs Chambers Westgarth and Minter Ellison. ALRC data indicates that while Maurice Blackburn cornered 50 percent of the Federal class actions market over the period from 1997 to October 2018, during the first ten months of 2018 their share of the market dropped to just 27 percent. In another sign of increasing competition in the market, a growing number of new firms and legal representatives are entering the Federal class actions market for the first time.21
2.4. A similar boost to competition is evident in the market for litigation funders. Once again, ALRC data indicates that over the period from 1997 to October 2018, IMF Bentham/Omni Bridgeway cornered 36 percent of the Federal class actions market. However, IMF Bentham funded just one of all the class actions finalised in the first ten months of 2018, reducing its share to just 12.5 percent of the market.22
2.5. As the ALRC has recognised, ongoing innovation in funding models is also generating greater choices for consumers (footnotes omitted):
In addition to the relatively straight forward model, where a third-party (a litigation funder) with no direct interest in the proceeding agrees to fund litigation in return for a share of any amount recovered if the case is successful, a much wider range of funding models has emerged and they continue to evolve. Portfolio funding or law firm financing is being promoted as an alternative to case-by-case funding. Broadly, there are two types of arrangements: the first involves finance structured around a law firm, or department within a law firm, where the claimants are various clients of the firm; and secondly, finance structured around a corporate claim holder or other entity which is likely to be involved in multiple disputes over a defined period of time. Some types of financing are increasingly a form of private equity, where third-party funders take an equity position in the
19 Vince Morabito, ‘The First Twenty-Five Years of Class Actions in Australia: An Empirical Study of Australia’s Class Action Regimes, Fifth Report’ (July 2017) 35. 20 Ibid 34. 21 Australian Law Reform Commission, above n 1, [3.42]. 22 Ibid [3.41]. claimant entity and, as such, gain control over its investment (in the litigation) through traditional corporate governance. Additionally, some funders now establish Special Purpose Vehicles (SPVs) to receive investment funds from a variety of sources including pension funds and educational trusts.23
Competition provides greater consumer choice
2.6. Phi Finney McDonald has witnessed first hand the benefits that increased competition has delivered for consumers. Our directors worked on the Centro class action brought by Slater and Gordon in 2008. Maurice Blackburn had earlier commenced a ‘closed’ class action primarily on behalf of institutional investors with funding from IMF Bentham/ OmniBridgeway. Slater and Gordon launched an ‘open’ class action for people excluded from Maurice Blackburn’s ‘closed’ proceeding with the support of an alternative funder, Comprehensive Legal Funding. The open class was primarily comprised of retail investors, however it also included some institutions that had been left out of the Maurice Blackburn closed class, or who were attracted to the lower funding commissions offered by the Slater and Gordon proceeding.
2.7. As Monash University Professor Vincent Morabito’s analysis confirms,24 prior to Slater and Gordon’s Centro class action Maurice Blackburn was the predominant plaintiff law firm in the Federal class actions market and IMF Bentham/Omni Bridgeway was the only litigation funder of note. Without competitive tension, the results were unsurprising:
(a) Litigation funding commissions ranged from 30 to 40 percent of gross settlements, with the legal fees charged/reimbursed on top.
(b) Those commissions would increase in 5 percent increments in the event of appeals, such that a funder might be entitled to over 50 percent of gross recoveries if the matter went to the High Court.
(c) The litigation funder charged additional ‘project management fees’, which would also be deducted from group member entitlements.
(d) Closed class actions would be commenced for institutional investors. Because the financial viability of a class action depended on executed litigation funding agreements, it was more economically efficient to secure the requisite support from
23 Ibid [1.40]. 24 Ibid, above n 22, 35. large loss holders. Confining the benefits of a class action to those that executed a funding agreement encouraged participation by large institutional investors and ensured that funder returns were not diluted by a damages pool being distributed across a broader class that included unfunded group members. This disenfranchised retail investors and impeded their ability to obtain justice.
2.8. Conversely, the ‘open’ class action achieved a $50 million settlement for the benefit of retail investors that would have been disenfranchised but for competition provided by Slater and Gordon and Comprehensive Legal Funding.
2.9. The Centro class action was the beginning of ‘the age of competition’ in Australia’s class actions regime, which continues to this day. Competition has brought the same benefits to the class actions and litigation funding market that it would be expected to bring to any other market. Increased competition has:
(a) Reduced the cost of legal services and litigation funding, including through the introduction of innovative funding models, dramatically increasing net returns to group members.
(b) Resulted in capital being invested in new sub-markets as existing sub-markets became saturated.
(c) Dramatically reduced the incidences of ‘closed class actions’ that would only benefit a sub-group of those persons affected by a legal wrong and disenfranchised many others.
(d) Required law firms and funders to improve the quality of the services they offer to consumers, including through the use of technology.
Competition is putting downward pressure on prices
2.10. Since 2017 we have observed a significant increase in the number of third party litigation funders interested in investing in Australian shareholder class actions. Phi Finney McDonad has identified four factors that are fuelling this demand:
(a) First, an established track record of successful cases.
(b) Second, an established body of interlocutory decisions relating to class action procedure, making it easier to predict how the Courts would respond in like cases.
(c) Third, the availability of common fund orders, which removed a critical barrier to entry in shareholder class actions, namely, the need to have any investor support.
(d) Fourth, the fact that baseline funding commissions had previously remained broadly unchanged for a decade.
2.11. The effect was a significant increase in the supply of litigation funding capital during a short period of time. This influx of new capital challenged the dominance of established players such as Maurice Blackburn and Slater and Gordon and changed the collective profile of class action law firms. Rather than being directed to the ‘traditional’ plaintiff firms, this capital was largely absorbed by commercial law firms, such as Corrs Chambers Westgarth, Johnson Winter + Slattery, Quinn Emanuel and Gilbert + Tobin, who were willing to do plaintiff side class actions work in addition to their traditional defendant work.
2.12. There was a concern among traditional plaintif firms that the rapid entry into the market of law firms inexperienced in ‘plaintiff work’ could result in the commencement of unmeritorious claims. However, these fears were not realised. Instead, this development produced two outcomes, each of which have been entirely positive for consumers:
(a) Increased competition for the same meritorious shareholder class actions.
(b) Litigation funders becoming willing to invest in other forms of meritorious class actions.
2.13. The processes courts use to resolve competing class actions demonstrate how increased competition is putting downward pressure on prices and delivering better outcomes for consumers. When deciding which case should proceed, the Courts invariably consider the financial terms offered by each of the group and – in most cases – price (and relatedly, group member support) has been a dominant outcome when determining which case is in the best interests of group members.
2.14. During 2018 and 2019, there were three ‘beauty parades’ in shareholder class actions, in which law firms competed for carriage of the case:
(a) In the GetSwift class action, Phi Finney McDonald was awarded carriage of the case. In that matter, litigation funder Therium’s commission will be either 2.8 x its paid costs or 20 percent of the net litigation proceeds, whichever is the lesser.
(b) In the BHP class action, Phi Finney McDonald was awarded carriage at first instance with a funding model that guaranteed group members would receive 82 percent of gross litigation proceeds. In the course of hearing an appeal, the Full Federal Court encouraged cooperation between competing plaintiffs which resulted in an amended common fund order under which group members are guaranteed to receive 85 percent of gross litigation proceeds up to $100 million and 90% of gross litigation proceeds about that amount.
(c) In the AMP class action, five competing class actions were reduced to one with Maurice Blackburn now running that claim without funding on a no win-no fee basis.
2.15. This Committee’s concern that consumers are paying litigation funders too much was valid 4 years ago, but is now out of date. And the reason why prices have come down is the very competition that this Committee now seeks to stamp out – supposedly for the benefit of consumers. You could not make it up.
3. Litigation funders deliver access to justice
Terms of Reference:
The impact of litigation funding on the damages and other compensation received by class members in class actions funded by litigation funders.
3.1. Litigation funding has a positive impact by providing access to justice for plaintiffs with legitimate claims, who would be left unable to obtain any compensation at all if they had been forced to fend for themselves. As the ALRC has acknowledged:
Litigation funding can be said to improve access to justice. There is empirical evidence that a number of successful actions would not have run absent the funding provided by litigation funders (our emphasis).25
3.2. Democracies such as Australia afford citizens substantive legal rights, such as the right to act in trade or commerce without being subject to unconscionable conduct by unscrupulous actors who abuse their market power and without being subject to capricious actions of government. These rights are meaningless if Australians have no means to enforce them. As the ALRC has recognised:
25 Ibid, above n 1, [6.1].
Litigation funding is an important element in facilitating access to the legal system, particularly in jurisdictions like Australia, Canada and the United Kingdom where the losing party, in addition to having to fund its own legal fees, is responsible for the costs of the successful party (our emphasis).26
3.3. In relation to the risks of adverse costs orders in ‘loser pays’ jurisdictions such as Australia, it is important to note that, in their funding agreements, litigation funders indemnify representative plaintiffs for any adverse costs orders, which serves to protect the representative plaintiff. This arrangement also serves a broader public good, as the risk of adverse costs orders discourages litigation funders from funding unmeritorious claims. The Australian situation can be distinguished from the laissez faire situation in the United States, where the ‘loser pays’ principle does not apply and the threat of adverse costs orders does not operate to deter unmeritorious claims.
3.4. The Productivity Commission has recognised that litigation funders increase access to justice by facilitating the prosecution of ‘genuine claims by plaintiffs who would otherwise lack the resources to proceed’ (our emphasis).27 The Productivity Commission also found that criticisms typically leveled at litigation funding were unfounded. 28
3.5. The High Court of Australia affirmed the legitimacy of third party litigation funding arrangements in the case of Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd.29 As the ALRC has observed, High Court was ‘unequivocal in its conclusion’ that, in Australia, the types of funding arrangements regularly entered into between litigation funders and class action plaintiffs ‘are not contrary to public policy’.30
26 Ibid [1.29]. 27 Productivity Commission, ‘Access to Justice Arrangements, Inquiry Report No 72, Vol 2, (5 December 2014) 607. 28 Ibid 613, 614 and 616-617. 29 Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386. 30 Ibid, above n 1, [2.50]. 3.6. The positive impact that litigation funders have on access to justice has also been recognised in other countries within the common law world, such as the United Kingdom. As the Right Honourable Lord Justice Sir Rupert Jackson PC observed in his Review of Civil Litigation Costs:
It is now recognised that many claimants cannot afford to pursue valid claims without third party funding; that it is better for such claimants to forfeit a percentage of their damages than to recover nothing at all; and that third party funding has a part to play in promoting access to justice.31
3.7. In an earlier report, the United Kingdom Civil Justice Council recommended that ‘properly regulated third-party funding should be recognised as an acceptable option for mainstream litigation funding’. 32
3.8. As noted above, the positive impact of litigation funding is increasing, as growing competition and innovation in the class actions and litigation funding market puts downward pressure on prices and produces better outcomes for consumers.
3.9. It should also be noted that the phenomenon of litigation funding is not entirely new, nor are professional third party funders the only source of litigation funding in Australia. In its 1988 report that precipitated the establishment of the Federal class actions regime, the ALRC noted ‘there was an increasing trend for litigation to be financed by a variety of groups, including trade unions and special interest groups’.33 A contemporary example of this type of third party funding would be the recent Live Cattle Exports class action which was funded by the Australian Farmers Fighting Fund.
31 The Rt Hon Lord Justice Jackson, Review of Civil Litigation Costs Preliminary Report (May 2009) 160. 32 Civil Justice Council, Improved Access to Justice – Funding Options and Proportionate Costs (2007) rec 3. 33 Ibid, above n 3, [315]. 3.10. A form of litigation funding that is often overlooked is the funding provided by the Australian taxpayer. The Australian taxation system allows corporations to claim the costs of legal expenses as a tax deduction, to reduce their overall tax bill.34 The Australian Financial Review reported35 that the four major banks and AMP expected to spend hundreds of millions of dollars on legal costs defending themselves before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry:
Institution Expected legal spend AMP $26,000,000 National Australia Bank $40,000,000 ANZ $50,000,000 Westpac $60,000,000 CBA $155,000,00036 TOTAL: $331,000,000
3.11. The Commissioner, the Hon Kenneth Hayne QC, identified substantial misconduct among many banking and financial services entities, causing devastating loss and damage to many Australians, including:
…conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them.37
3.12. It would be peverse if the proposed ‘reforms’ allowed malfeasant banks to obtaining litigation funding from Australian taxpayers, but left the taxpayers who were the victims of thier egregious misconduct unable to obtain compensation because they could not access the third party funding necessary to bring a claim.
34 Australian Taxation Office, General Business Operating Expenses (13 November 2019) , https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Deductions- for-operating-expenses>. 35 Misa Hand and Joanna Mather, ‘Banks spend hundreds of millions on Hayne’, Australian Financial Review, 27 September 2018. 36 The Commonwealth Bank said it spent $155 million on "one-off regulatory costs", which includes the cost of the Royal Commission as well as the cost of defending money-laundering allegations from AUSTRAC and responding to the Australian Prudential Regulation Authority's inquiry into CBA. 37 Commonwealth of Australia, Royal Commission into Misconduct in the Banking, Financial Services and Superannuation Industries, Final Report (2019) 1, 4. Contingency fees
Terms of Reference:
The potential impact of proposals to allow contingency fees and whether this could lead to less financially viable outcomes for plaintiffs.
The effect of unilateral legislative and regulatory changes to class action procedure and litigation funding.
The consequences of allowing Australian lawyers to enter into contingency fee agreements or a court to make a costs order based on the percentage of any judgment or settlement.
4.1. Phi Finney McDonald submits that all the pertinent issues in relation to contingency fees have been exhaustively ventilated through the 2014 Productivity Commission inquiry into access to justice, the more recent ALRC and Victorian Law Reform Commission (VLRC) inquiries into class actions and litigation funding and through parliamentary scrutiny and debate in relation to the Justice Legislation Miscellaneous Amendments Bill 2019, which, at the time of writing, is currently before the Victorian Legislative Council.
4.2. In these circumstances, we do not see any remaining need to address contingency fees in this submission. However, we would welcome the opportunity to make a supplementary submission in relation to contingency fees in the future, if the relevant circumstances change.
5. Regulation of litigation funders and class action law firms
Terms of Reference:
The financial and organisational relationship between litigation funders and lawyers acting for plaintiffs in funded litigation and whether these relationships have the capacity to impact on plaintiff lawyers’ duties to their clients.
The regulation and oversight of the litigation funding industry and litigation funding agreements.
5.1. A number of related issues to this Term of Reference are canvassed elsewhere in this submission. Phi Finney McDonald submits that all the pertinent issues in relation to the regulation of class action law firms, litigation funders and litigation funding agreements have been exhaustively canvassed and addressed through the 2014 Productivity Commission inquiry into access to justice, the more recent ALRC and VLRC inquiries into class actions and litigation funding and also through parliamentary scrutiny and debate in relation to the Justice Legislation Miscellaneous Amendments Bill 2019.
5.2. Noting that a range of experts are unable to identify any significant evidence of issues warranting heavy-handed regulation, and indeed heavy-handed regulation would likely have the perverse outcome of reducing access to affordable justice by stifling the current competition that is driving lower costs, we do not see any compelling reason to ignore the recommendations of the ALRC and VLRC or the evidence which drove the development of the Victorian Legislation. However, we would welcome the opportunity to make a supplementary submission in relation to these topics in the future, if the prevailing circumstances change.
6. Application of the Australian Financial Services Licensing regime
Terms of Reference:
The Australian financial services regulatory regime and its application to litigation funding.
AFSL and MIS regimes are not fit for purpose
6.1. ASIC and the ALRC have both stated that the AFSL and MIS regimes are not fit for the purpose of regulating class actions and litigation funding. We support the alternative measures recommended in the ALRC report, which build on existing regulatory arrangements governing the sector, in order to address any perceived regulatory gaps. We strongly urge the Government to abandon its proposal to extend the AFSL and MIS regimes to the class actions and litigation funding and to instead embrace the ALRC’s recommendations.
6.2. In its submission to the ALRC inquiry, ASIC stated that the AFSL and MIS regimes are not appropriate for regulating litigation funding arrangements, and that ASIC was itself not the appropriate regulator for the class actions and litigation funding sector.38 ASIC’s submission was analysed clearly and persuasively by the ALRC, which unequivocally agreed that the AFSL and MIS regimes are inapt to regulate class actions and litigation funding.39
6.3. The MIS regime was not designed to regulate class action litigation funding arrangements. It was never intended that these litigation funding arrangements would be considered a MIS. The characterisation of class action litigation funding arrangements as an MIS was the product of a novel and unexpected interpretation of the law adopted by two of the Appellate Judges who presided over the case of Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 (Multiplex Case). It should be noted that the third Justice who heard this appeal rejected the argument that class action litigation funding arrangements met the definition of an MIS,40 as did the Justice who presided over the original trial.41
6.4. In response to the unexpected Appeal Court decision, ASIC granted transitional relief to law firms and litigation funders involved in class actions that were already on foot. As noted in the accompanying media release, ASIC explained the decision to grant relief from the MIS regime was particularly driven to protect the rights of retail clients who would ‘immediately suffer considerable delay, expense, uncertainty and disruption as a consequence of the decision.42
6.5. Both the ALRC and ASIC have warned that imposing the ill-suited regulatory requirements on the sector will have damaging consequences. Numerous Federal Court Justices have sharply questioned the wisdom of characterising class action litigation funding arrangements as an MIS. The collective opinions of these distinguished agencies and the judiciary should not be ignored.
38 Australian Securities and Investments Commission, Submission No 72 to the Australian Law Reform Committee, Inquiry into Litigation Funding, September 2018, Part B. 39 Ibid, above n 1, [6.34]. 40 Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 (dissenting judgment of Jacobson J). 41 Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (No 3) [2009] FCA 450 (Finkelstein J). 42 Australian Securities and Investments Commission, ‘ASIC grants transitional relief from regulation for funded class actions’ (Media Release, 09-218MR) 4 November 2019. Regulation will reverse the gains of competition
6.6. Imposing onerous regulations on class actions and litigation funding will reverse the recent gains for consumers which have been achieved through flourishing competition and growing innovation in the sector, as outlined elsewhere in this submission.
6.7. Navigating the red tape necessary to obtain an AFSL – which according to ASIC’s own Service Charter may take longer than eight months and which financial services experts warn may consume significant resources – will be burdensome and costly. The costs of managing the ongoing compliance obligations imposed by the AFSL and MIS regimes will be high.
6.8. The costs and impact of unnecessary red tape will drive some litigation funders and law firms out of the market. That would seem to be the intent of the corporate interests that are driving these regulatory proposals. Ironically, these regulatory changes will achieve nothing in the long term other than reinvigorate the historical dominance of large established plaintiff law firms and one or two monolith litigation funders. Insodoing, it will crush competition, stifle innovation, reduce choice and push up prices for consumers, including ‘Mum and Dad’ investors, self-funded retirees, small and family businesses and primary producers living in Regional Australia.
6.9. Not only do these reform proposals run contrary to the Government’s general pro-market disposition. Perversely, implementing this agenda will serve the interests of the one or two ‘politically aligned’ plaintiff law firms, the targeting of which some commentators have suggested is one of the Government’s true motivations for supporting corporate Australia’s pleas to be shielded from class actions.
6.10. That heavy-handed and ill-suited regulation will destroy competition and revive the dominance of a few large established players is not a theoretical risk. There is a reason by IMF Bentham/Omni Bridgeway and Litigation Capital Management are the only funders who are enthusiastically endorsing a licencing regime. The former previously had an AFSL and knows it can get one again.
6.11. Litigation Capital Management has an AFSL. It issued a media release stating that the reform proposals would deliver it:
…a strategic advantage as the cost and compliance issues is [sic] likely to create further barriers to entry and restrict the numbers of financiers that can fund class actions.43
6.12. It would be deeply disappointing if the decision to remove the AFSL and MIS exemptions concentrated market power in the hands of a few law firm and litigation funder monoliths. This would be to their benefit and to the detriment of class members.
AFSL and MIS regimes are excessive
6.13. Imposing the heavy-handed AFSL and MIS licensing regimes to the class actions and litigation funding sector would be an excessive regulatory step, mistakenly taken in response to a false assumption. Despite the shrill cries of certain lobby groups seeking safe harbour from class actions, there is no ‘explosion’ in the number of class actions in Australia and class actions are not ‘out of control’. As outlined elsewhere in this submission, class actions make up just 0.68 percent of cases filed in the Federal Court each year. In addition, the number of new class actions fell markedly in 2019, as confirmed by commercial law firm Allens Linklater and distinguished academic expert Vincent Morabito.
6.14. It is also notable that the primary argument in the AICD’s submission to this inquiry is that class actions do in fact play a ‘critical role…in facilitating access to justice in other areas of the law, such as product liability and environment cases’ (our emphasis). The one area in which the AICD believes class actions have no role to play is shareholders class actions because – unsurprisingly – such proceedings are contrary to the interests of the AICD’s members. Beyond the patent self-interest in claiming such a specific exemption, the prescription actually goes much wider including by:
43 Litigation Capital Management, ‘Australian Regulation of Litigation Funders’ (Media Release) 26 May 2020. (a) Imposing excessive regulatory burdens on class action law firms and litigation funders, which would crush the market broadly and make it more difficult for consumers to seek access to justice. We note that, if these regulations were already in place, Phi Finney McDonald would not have been in a position to guarantee that plaintiffs will recover between 85 and 90 percent of gross litigation proceeds in the BHP class action.
(b) Removing the ability of private plaintiffs to bring claims for breach of continuous disclosure rules and laws prohibiting directors from engaging in misleading and deceptive conduct, leaving it solely to ASIC to enforce these important laws – a proposal which ASIC strongly opposes, noting the critical role that private plaintiffs play in upholding the law and deterring poor behaviour, as outlined elsewhere in this submission.
(c) Permantently watering-down continuous disclosure and misleading and deceptive conduct laws – a move which ASIC has forcefully argued would be fundamentally bad for the Australian economy and Australia’s financial markets.
6.15. The AICD’s primary submission that class actions and litigation funding are a good thing – except when they adversely affect their members - is an admission that the existing regulatory regime is generally functioning well, that heavy-handed intervention is unwarranted and that it would only serve a very narrow interest.
6.16. For the sake of completeness and noting that class actions actually represent a miniscule proportion of actions faced by corporate interests, Phi Finney McDonald disagrees that the directors of Australia’s largest and most powerful companies deserve special treatment under the law:
(a) Directors of these companies have unrivalled resources and an army of professional advisers at their fingertips, a position that most Australians could only dream of, especially the hard-working and entrepreneurial Australians who run small and family businesses who would face even more challenges to their already limited ability to get their day in court.
(b) We are similarly unconvinced that it is a bad thing for the directors of Australia’s largest companies to spend time considering whether their conduct might be illegal. As the Royal Commission into Misconduct in the Banking, Financial Services and Superannuation Industries starkly demonstrated, the greater risk is in company directors and other senior executives becoming complacent about their legal obligations or erroneously believing they are above the law.
(c) We note that –
(i) When an Australian motorist gets behind the wheel of a car, they are expected to obey speed limits and traffic signals.
(ii) When an Australian taxpayer signs their tax return, they must ensure that they are legally entitled to claimed deductions, under threat of criminal sanction.
(iii) When an older Australian claims a pension, they are expected to declare any non-pension income and can be sanctioned if they fail to do so.
(iv) Small business owners are required to comply with a plethora of employment regulations and tax laws on a daily basis, and do so without any of the advice or resources available to large company directors .
(d) Neither in the small quantum of class actions, nor in the obligation to be properly cognisant of the legal impact of their decisions has the AICD, the Australian Industry Group or the Business Council of Australia justified why their members were deserving of special treatment. Their members might have decided against charging fees for no service, to not to offer junk insurance that provided no coverage, to say nothing rather than issue profit guidance that had no reasonable basis. Governments did not have to poison land with toxic carcinogens, or use crude algorithms to impose punitive debt collection measures on low income welfare recipients.
(e) Class actions only exist because corporate and government misconduct exists.
Urgent need to clarify how the AFSL and MIS regimes will apply to litigation funding
6.17. Even if there was some argument for momentary relief during the immediate response to COVID-19, there is little justification for regulatory changes beyond the recommendations made by the ALRC.
6.18. There is an urgent need to clarify precisely how any AFSL and MIS regimes are proposed to apply to litigation funding. On 22 May 2020 the Treasurer, the Hon Josh Frydenberg MP, announced the Government would repeal the regulations which currently exempt litigation funders from the requirement to hold an AFSL and exclude litigation funding arrangements from the definition of an MIS.44 Mr Frydenberg advised that new regulations would be promulgated to govern how the AFSL and MIS regimes will apply to litigation funding, which will take effect from 22 August 2020.
6.19. At the time of writing, the Government is yet to reveal the content of the new regulations, which will become law in just over two months’ time. This has created great uncertainty in the litigation funding market, which deters what is otherwise legitimate support for a range of cases on foot as well as future access to justice. It is vital that an exposure draft of the new regulations is urgently released for public consultation and to provide stakeholders the opportunity to be heard before they are finalised.
Retrospective application is unconscionable
6.20. It is important that class actions that have already been commenced are not captured by future regulations that were not in place when the harms occurred and current actions were developed. Unhelpfully, the nature of any proposed transitional arrangements is currently unclear.
6.21. There is currently a live risk that:
(a) Class actions which have already commenced will come to a grinding halt, unless and until the appropriate licenses can be acquired. Specialist financial services law firm McMahon Clarke advises the bureaucratic process of preparing an AFSL application takes at least four weeks.45 According to the ASIC Service Charter, once the AFSL application is submitted, ASIC aims to finalise 90 percent of AFSL applications within 240 days (approximately eight months).46
(b) The millions of Australians who are currently participating in class actions, from all walks of life and all parts of the Federation, will have their expectations of justice dashed. As outlined elsewhere in this submission, this includes a range of small business and small investor interests who are locked in battle with some of the most powerful interests and with some of the deepest pockets in the world.
44 Josh Frydenberg MP, Treasurer of Australia, ‘Litigation funders to be regulated under the Corporations Act’ (Media Release 22 May 2020). 47 Ibid, above n 49. 47 Ibid, above n 49. (c) The process the courts use to manage class action litigation will be massively disrupted and case backlogs will grow, with flow on effects to the broader civil justice system. There will be a blow out in the cost of class action litigation for parties to the proceedings and increased operating costs for courts.
(d) As an important matter of principle, individuals or organisations who arrange their affairs in good faith based on the established law of the land, including important business and financial decisions, should not have the rug swept out from under them through rushed changes to the law.
6.22. Specialist financial services law firm McMahon Clarke advises that delays in processing licence applications tend to grow ‘depending on the complexity of the application and ASIC’s resources’.47 This does not bode well for licence applications in relation to litigation funding. It would be expected that processing such licences would fall at the more complex end of the spectrum, given the novelty of licensing litigation funding under the AFSL and MIS regimes, and that bringing an entirely new sector into the regulatory fold would consume a significant amount of ASIC’s resources.
6.23. This only serves to reinforce the risks of ignoring the advice of the ALRC, ASIC and others and proceeding with a model that is not fit for purpose.
7. Common fund orders
Terms of Reference:
The application of common fund orders and similar arrangements in class actions.
7.1. Phi Finney McDonald submits that all the pertinent issues in relation to common fund orders have been exhaustively considered through the ALRC and VLRC inquiries into class actions and litigation funding and before the High Court of Australia in the matter of BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45. While Brewster raised significant issues in relation to common fund orders, we do not believe this Inquiry is to appropriate forum to litigate those issues.
47 Ibid, above n 49. 7.2. In these circumstances, we do not see any remaining need to address this subject in this submission. We would welcome the opportunity to make a supplementary submission in relation to these topics in the future, if circumstances change.
8. Class actions have a positive impact on the Australian economy
Terms of Reference:
Economic impacts
Factors driving the increasing prevalence of class action proceedings in Australia.
What evidence is becoming available with respect to the present and potential future impact of class actions on the Australian economy.
The potential impact of Australia’s current class action industry on vulnerable Australian business already suffering the impacts of the COVID-19 pandemic.
Busting the myth about the class action numbers
8.1. The hysterical claim from big business lobby groups that the number of class actions in Australia is ‘exploding’ is simply not supported by the facts.
8.2. In fact, the ALRC found that class actions made up just 0.68 percent of cases filed in the Federal Court each year:
Class action proceedings constitute only a small number of the proceedings filed in the Federal Court annually. For example, up to 4,659 proceedings were filed in the Federal Court in the 2017-18 financial year, with 32 of these beling class action proceedings. This amounted to 0.68% of the Court’s filings – a percentage that has only slightly increased since 2013-14 (our emphasis).48
48 Ibid, above n 1, [3.13]. 8.3. Recent data indicates that the number of class actions is actually falling. Commercial law firm Allens Linklaters reports that class action filings fell by 20 percent in 2019.49 Similarly, Professor Vincent Morabito of Monash University found the number of class actions filed in all Australian courts fell from 66 in 2018 to 54 in 2019. As Professor Morabito says, this is “hardly evidence of an ‘explosion’ of class actions”.50
8.4. Further, as Professor Morabito has also ackonwledged, the rate of class actions in Australia is relatively lower than comparable overseas jurisdictions:51
(a) 5,687 class actions were filed in Israeal between 2007 and 2015, approximately nine times the total number of class actions filed in Australia during the period from March 1992 to June 2019. Israel has a population of approximately eight million, compared to Australia’s population of approximately 25 million.
(b) 1,459 class actions were filed in the Canadian province of Ontario alone between 1993 and 2017, averaging 54 cases each year. Ontario has a population of 14 million. In the same period, an average of 50 class action cases were filed in the province of Quebec, which has a population of 8 million.
Class actions are driven by plaintiffs seeking compensation for loss and damage
8.5. As with most litigation in Australia, class actions are driven by plaintiffs who seek compensation for loss and damage suffered as a result of the illegal conduct of a defendant.
8.6. The Royal Commission into Institutional Responses to Child Sexual Abuse uncovered shocking evidence which enabled survivors to finally seek compensation for the abuse they suffered, including through the class action process. For example, following evidence uncovered by the Royal Commission, a class action was commenced by 71 survivors of abuse at the Retta Dixon Home, an Aboriginal children’s home operated by Australian Indigenous Ministries under the supervision of the Commonwealth.52 The Royal Commission held public hearings in relation to the Retta Dixon Home in Darwin in September and October 2014 and the Home was the subject of the Royal Commission’s
49 Allens Linklaters, ‘Class Action Risk Report 2020’ (2020) Figure 1. 50 Vincent Morabito, as cited by Adele Ferguson, ‘Class actions the next political battleground’, Australian Financial Review (Sydney), 1 June 2020. 51 Vincent Morabito ‘Shareholder Class Actions in Australia – Myths v Facts’, 11 November 2019. 52 Piper Ellis Lawyers, ‘Retta Dixon Class Action Preparing for Mediation’ (Media Release, November 2016). Case Study Number 14 of 2017, which revealed that generations of children had been systematically abused at the Home between the 1940s and 1980s.53 The case was settled for an undisclosed sum following mediation.54
8.7. Likewise, a significant number of recently commenced class actions were precipitated by the widespread illegality and dishonesty in the corporate sector exposed by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Class actions have a positive impact on the economy
8.8. As the ALRC has recognised, class actions have a positive impact by allowing vindication of regulatory policies which are essential to the healthy functioning of the Australian economy and its appeal as a destination for foreign investment, such as rules which require continuous disclosure of price sensitive information to the market and laws which punish directors for engaging in misleading and deceptive conduct.55
8.9. As ASIC has acknowledged, shareholder class actions play a positive role in enforcing these economically essential laws (footnotes omitted):56
Shareholder class actions can play an important and complementary role in improving shareholder access to justice and fostering accountability.
The Corporations Act provides clear avenues for shareholders and consumers to take legal action to enforce their rights. It was clearly not intended that the regulator should have a monopoly on legal action. Where private action can achieve a similar outcome to that which action by ASIC could achieve, it allows ASIC to allocate its regulatory resources to other priorities. ASIC encourages investors to consider private legal action where appropriate to obtain compensation for losses investors may have suffered…
53 Royal Commission into Institutional Responses to Child Sexual Abuse, ‘Case Study 17: Retta Dixon Home’ (2014)
In addition to promoting access to justice, class actions can spread the risks of complex litigation and improve the efficiency of litigation by introducing commercial considerations that may reduce costs. The prospect of a shareholder class action can also serve as a positive influence on a firm’s governance and culture, improving accountability.
Effect on vulnerable businesses during the COVID-19 pandemic
8.10. The existence of the class actions regime will help to protect vulnerable businesses during the COVID-19 pandemic and support the continued functioning of the Australian economy throughout these troubling times.
8.11. For example, the threat of class actions, such as that which has been commenced against RFG on behalf of Michel’s Patisserie franchisees, will serve as a warning to unscrupulous operators who may be tempted to abuse their market power to exploit small and family businesses who have been left vulnerable by the economic shock caused by the pandemic.
8.12. Further, as ASIC has acknowledged, the threat of shareholder class actions will help to ensure company directors obey continuous disclosure obligations and comply with the prohibition against misleading and deceptive conduct, which are critical to the efficient functioning of the Australian economy during this difficult period.
8.13. The outcome of the Live Cattle Exports class action will also act as a handbrake on governments who might seek to exploit COVID-19 as an excuse to justify caprcious actions against vulnerable industries, such as primary producers living in regional Australia.
9. Recent developments
Terms of Reference:
Evidence of any other developments in Australia’s rapidly evolving class action industry since the Australian Law Reform Commission’s inquiry into class action proceedings and third-party litigation funders.
9.1. The most significant development since the ALRC Inquiry is the attempt by the big business lobby to use the COVID-19 pandemic as cover to argue for substantive changes to continous disclosure rules and the prohibition on directors engaging in misleading and deceptive conduct. The big business lobby is also pushing for procedural changes to take the teeth out of continuous disclosure and misleading and deceptive conduct rules by arguing only ASIC should be able to enforce those provisions in court, cutting shareholders out of the process.
9.2. As outlined elsewhere in this submission, this would be a retrograde step which would damage Australia’s financial markets and the Australian economy. As ASIC has explained, private plaintiffs play an essential role in enforcing continuous disclosure and misleading and deceptive conduct rules, which are of central importance to the integrity of the market and the economy:57
The continuous disclosure obligations are critical to protecting shareholders, promoting market integrity and maintaining the good reputation of Australia’s financial markets ($1.84 trillion market capitalisation with an average turnover of $5.9 billion a day). The economic significance of fair and efficient capital markets dwarfs any exposure to class action damages.
The regime has provided significant benefits including increased investor participation and investment, higher liquidity, and lower transaction costs. It is also the anchor point for other elements of Australia’s regulatory regime (including low document capital raising through rights issues).
[…]
57 Ibid, above n 42, [4-5] and [9]. The misleading or deceptive conduct prohibition is also fundamental and applies very broadly beyond market disclosures and class actions to conduct in relation to financial products or services and conduct in trade and commerce generally (our emphasis).
9.3. Furthermore, ASIC is not sufficiently resourced to bring all the cases that ought to be brought. In light of the substantial budget deficit caused by the response to the COVID-19 pandemic, it is unlikely the Federal Government will be in a position to provide ASIC the huge quantum of additional resources necessary to enable the corporate regulator to exclusive police disclosure and misleading and deceptive conduct laws.
9.4. The fact that ASIC already brings relatively few cases in relation to breaches of continuous disclosure and misleading and deceptive conduct laws is not a sign that there are too many private actions, but instead irrefutable evidence that the corporate regulator lacks the resources to effectively enforce the law absent the complementary enforcement provided by claims brought by private plaintiffs.
9.5. On the one hand, the AICD suggests that defending ASIC actions would be less expensive, but on the other hand argues that ASIC should be empowered to seek compensation on behalf of affected investors. In those circumstances, it is reasonable to conclude that, in the undesirable event the AICD’s proposals were adopted in full:
(a) ASIC would come under substantial public pressure to dramatically increase the number of shareholder cases brought in order to provide a mechanism for investor redress.
(b) ASIC-brought cases would be just as fiercely defended as private class actions, just as expensive to listed entities and just as likely to result in settlements of substantial size.
(c) The ‘mischiefs’ the AICD complains about (distraction of directors from other issues, high cost of insurance, money shifting between pockets and money being spent on legal costs) would continue unabated.
9.6. Underlying the AICD’s self-interested proposal is the expectation that ASIC will not in fact be given the resources to bring claims seeking compensation for affected investors. Its real intention is to achieve under-regulation of listed entities and to create a barrier to investors securing rightful compensation. The AICD is seeking a regulatory environment where breaches of disclosure obligations are rarely enforced.
9.7. It is true that litigation funders are motivated by commercial concerns, which ensures that they only fund meritorious claims. The substantial cost of funding class actions, and the risk of paying adverse costs if the case was to fail, has ensured that only meritorious class actions have been commenced.
9.8. The fact that shareholder class actions have been settled for large sums necessarily reflects both the fact that the respondent (and its legal advisors) believed there was a real risk that they would be found liable for the contraventions, as well as the magnitude of the harm caused to investors as a result of those contraventions.
9.9. Finally, we reject the assertions that shareholder class actions are responsible for driving up the cost of D&O insurance premiums. There is absolutely no evidence for this proposition. In its ALRC Submission, international commercial law firm Norton Rose Fulbright, explained that D&O market has been notoriously underpriced and that the recent premiums increases are the result of a long overdue correction.58
10. Background
The ALRC inquiry into and report on class actions and litigation funding.
10.1. The Australian Law Reform Commission (ALRC) report on litigation funding and class actions was tabled in the Australian Parliament 18 months ago, on 24 January 2019. The ALRC report contained 24 thoroughly-considered, well-received recommendations to promote fairness and efficiency in class action proceedings, protect litigants from disproportionate costs and ensure the integrity of the civil justice system.
10.2. The ALRC report was the product of a robust year-long inquiry overseen by six eminent Federal Court Justices, supported by nine distinguished Professors of Law from Australia, the United States of America, Canada, Europe and the United Kingdom.
10.3. The ALRC inquiry considered over 75 formal submissions and engaged in over 60 consultations with stakeholders from academia, members of the legal profession with expertise acting in class actions for both plaintiffs and defendants, litigation funders,
58 Norton Rose Fulbright, Submission No 40 to the Australian Law Reform Committee, Inquiry into Litigation Funding, September 2018, 5. insurance companies, representatives from the corporate sector, government agencies, courts and tribunals and previous class action plaintiffs.
10.4. The ALRC inquiry was initiated by former Federal Attorney-General, Senator the Hon. George Brandis QC. The inquiry was conducted in accordance with Terms of Reference drafted by Senator Brandis in December 2017.
10.5. The ALRC report was presented to the current Federal Attorney-General, the Hon Christian Porter MP, in December of 2018. While the ALRC did not recommend a further parliamentary inquiry, Phi Finney McDonald welcomes the opportunity to make a submission to the Committee and to participate in the Committee process.
10.6. The Federal Government is yet to respond to the ALRC report.
10.7. The ALRC identified three overarching principles which guided its assessment of the integrity, fairness and efficiency of litigation funding and class actions.
10.8. The three overarching principles embraced by the ALRC were:
Principle One: It is essential to the rule of the law that citizens should be able to vindicate just claims through a process characterised by fairness and efficiency to all parties, that gives primacy to the interests of the litigants, without undue expense or delay.
Principle Two: There should be appropriate protections in place for litigants who wish to avail themselves of the class action system and the variety of funding models that facilitate the vindication of just claims.
Principle Three: The integrity of the civil justice system is essential to the operation of the rule of law.
10.9. Phi Finney McDonald agrees with the ALRC that these overarching principles are a touchstone which should guide any assessment of the role that litigation funding and class actions play in the Australian justice system.
10.10. We believe that the centrality of these principles is implicit in the Terms of Reference for the current Inquiry, which ask the Committee to consider whether the present operation of the class actions system is delivering “fair and equitable outcomes for plaintiffs”.
11. Phi Finney McDonald
11.1. PFM is a boutique law firm based in Melbourne that specialises in complex and large-scale litigation. Our principals and senior lawyers have substantial experience in class action litigation in the Federal Court of Australia, as well as the Supreme Courts of Victoria and New South Wales. We have conducted class actions using third party commercial litigation funding and under “No Win, No Fee” arrangements. Our experience extends across shareholder class actions, product liability claims, employment disputes, financial products and services cases, institutional abuse class actions and claims against governments for negligence and misfeasance in public office.
11.2. Nothing in this submission is to be construed waiving client privilege or confidentiality.