Redressing Mass Harm: ADR, Class Actions and Regulatory Responses
The Case of Storm Financial Limited
Paper presented at Redress and Regulation Seminar, University of New South Wales, Sydney, 13 February 2014
Associate Professor Michael Legg UNSW Australia Law
T: 61 2 9385 9653
1 | P a g e Michael Legg
Contents Introduction ...... 3
Approaches to Redressing Mass Harm ...... 3 United States of America ...... 3 Europe ...... 5 The Organisation for Economic Co-operation and Development (OECD) ..... 7 Australia ...... 8
Background to the Storm Financial Collapse ...... 9
Bank Resolution Schemes ...... 11
Financial Ombudsman Service ...... 12
ASIC Proceedings ...... 15 Freezing Dividends and Winding Up Storm Financial ...... 16 Civil penalty / Disqualification proceedings against the Cassimatises ...... 17 Compensation proceedings against Banks ...... 18
Class Actions ...... 20
Joint Case Management and Trial ...... 22
ADR, Class Actions and Regulatory Litigation Compared ...... 23 Outcome/Effectiveness ...... 23 Cost ...... 28 Delay / Time to Resolution...... 30 Efficiency ...... 33
Co-ordination of Responses to Mass Harm ...... 34
Conclusion ...... 38
Note: this paper is drafted on the basis of the status of the various Storm Financial proceedings as at 6 February 2013, including where judgment is reserved in one regulatory suit and one class action.
2 | P a g e Michael Legg
Redressing Mass Harm: ADR, Class Actions and Regulatory Responses – The Case of Storm Financial Limited
Associate Professor Michael Legg, UNSW Australia Law
Introduction
Modern society is characterised by mass manufacturing, mass marketing and mass consumption. These characteristics mean that when harm occurs in can often be on a large scale impacting numerous persons. Society has attempted to respond to this phenomenon in a number of ways: having the State, often through a government regulator, take responsibility for securing redress, providing procedures for mass claims in litigation such as the class action and creating alternative disputes resolution (ADR) schemes. The ubiquity of the problem is demonstrated by numerous jurisdictions, including the United States and Europe, seeking to devise effective responses to mass harm.
This paper seeks to compare ADR, class actions and regulatory responses to mass harm through the lens of the collapse of Storm Financial Limited. The Storm Financial collapse was met with responses from each of the categories referred to above: the banks that made loans to Storm Financial clients established a voluntary dispute resolution scheme. The Financial Ombudsman Scheme was also available for use. other clients banded together and commenced a representative proceeding pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth). the Australian Securities & Investments Commission (ASIC) commenced legal proceedings against the directors of Storm Financial and the banks. ASIC also secured an oversight role for itself in the voluntary dispute resolution scheme and intervened in the settlement of the class action.
Approaches to Redressing Mass Harm
United States of America
Perhaps the most well-known and publicised response to an incidence of mass harm in the public psyche is the American class action which was introduced into the Federal Rules of Civil Procedure in 1966 through the extensive amendment of rule 23.1 The class action provides a procedural vehicle for claims in a range of substantive areas of law such as civil rights, environmental harm, antitrust, securities, product liability and consumer protection. The class action facilitates access to justice and compensation by aggregating claims, levelling the playing
1 Deborah Hensler, Nicholas Pace, Bonita Dombey-Moore, Beth Giddens, Jennifer Gross and Erik Moller, Class Action Dilemmas (RAND Institute for Civil Justice 2000); Arthur Miller, ‘Of Frankenstein Monsters and Shining Knights: Myth, Reality , and the “Class Action Problem”’ (1979) 92 Harvard Law Review 664, 664-665; Richard Marcus, ‘America’s Dynamic and Extensive Experience with Collective Litigation’ in Christopher Hodges and Astrid Stadler, Resolving Mass Disputes (Edward Elgar 2013) Ch 7.
3 | P a g e Michael Legg field and overcoming the collective action problem.2 The Supreme Court of the United States explained the significance of the class action in Deposit Guaranty Bank v Roper :3
The aggregation of individual claims in a classwide suit is an evolutionary response to the existence of injuries unremedied by the regulatory action of the government. Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class action device.
Class actions have also attracted significant criticism for creating a litigious culture, enriching lawyers but without achieving meaningful compensation for those that have been harmed and placing excessive pressure on defendants to settle regardless of the merits of a claim.4 These concerns derive not just from the class action but also from other aspects of the American civil justice system such as the American rule for costs and the use of juries.5
However, “all societies already possess an institution designed to overcome collective action barriers to common security and the proper allocation of burdens and resources: the state”.6 The US is no different, government through a regulator still plays an important role in addressing mass harm, for example, the Securities Exchange Commission (SEC), the Federal Trade Commission and the Environmental Protection Agency. While regulators have traditionally focussed on compliance or deterrence, enforcement strategies have become more multi-faceted and compensation has been accepted as an acceptable, even desirable, regulatory response.7 For example the SEC has since 2002 had the power to distribute money penalties that it obtains to the victims of the violation pursuant to the Fair Fund provision, section 308 of the Sarbanes- Oxley Act.8
2 See In re Auction Houses Antitrust Litigation 197 FRD 71, 72 (SDNY 2000) ("Class action lawsuits protect plaintiffs' rights and promote accountability by permitting dispersed, disorganized plaintiffs who may have suffered only small injuries to find redress by acting as a group where they would lack sufficient incentive to do so individually."). 3 Deposit Guaranty Bank v Roper 445 US 326, 339 (1980). 4 Richard Marcus, ‘America’s Dynamic and Extensive Experience with Collective Litigation’ in Christopher Hodges and Astrid Stadler, Resolving Mass Disputes (Edward Elgar 2013) 151. 5 Michael Legg, ‘Litigation nation — Revisiting contingency fees, litigation funding and class action fees in Australia - Book Review of Lawyer Barons: What Their Contingency Fees Really Cost America by Lester Brickman’ (2012) 20 Tort Law Journal 21. 6 Samuel Issacharoff, ‘Class Actions and State Authority’ (2012) 44 Loyola University Chicago Law Journal 369, 371 and Samuel Issacharoff, ‘Governance and Legitimacy in the Law of Class Actions’ (1999) Supreme Court Review 337, 338. 7 See eg Robert Baldwin, Martin Cave and Martin Lodge, Understanding Regulation (Oxford University Press 2d ed 2012) 128-130. 8 Securities Exchange Commission, Statement of the Securities Exchange Commission Concerning Financial Penalties, 4 January 2006.
4 | P a g e Michael Legg Further, the US was a pioneer in the field of ADR and has incorporated it into both civil litigation and regulatory schemes. The modern dispute resolution movement, in law, is usually dated from the 1976 National Conference on the Causes of Popular Dissatisfaction with the Administration of Justice, commonly known as the Pound Conference.9 However, various forms of ADR have existed throughout American history.10 ADR became entrenched in the Federal Court system when Congress enacted 28 U.S.C. § 651, also called the Alternative Dispute Resolution Act of 1998, and authorized federal district courts to implement ADR programs.11 ADR has been actively promoted in relation to consumer complaints but with a mixed reception. Some have seen it as empowering consumers while others have seen it as undermining access to the courts, including through the class action.12 The issue rages today in relation to consumer contracts which mandate arbitration and exclude access to class actions.13
Europe
In Europe there has been a concerted effort to devise responses to mass harm that avoid the perceived problems of the US class action.14 Consequently the European rhetoric evolved from “class actions” to “collective redress”.15 Redress encompasses the idea of “setting things right” and includes preventing misconduct, and restoring those that have been harmed to their previous position, usually through compensation.16 Collective redress focusses on the outcome rather than the mechanism for prevention or restoration and therefore may include a range of mechanisms such as litigation and mediation.17 In Europe collective action proceeded through three phases: first, injunctive suits brought by consumer organisations, second, court rules for managing multiple similar claims and third, allowing for actions to claim damages in the consumer and
9 Frank Sander, Varieties of Dispute Processing, 70 FRD 111 (1976); Jerold Auerbach, Justice Without Law? (Oxford University Press 1983) 123. 10 See Jerold Auerbach, Justice Without Law? (Oxford University Press 1983). 11 Holly A. Streeter-Schaefer, ‘A Look at Court Mandated Civil Mediation’ (2001) 49 Drake Law Review 367, 369-373; Stephen Subrin, ‘A Traditionalist Looks at Mediation: It’s Here to Stay and Much Better Than I Thought’ (2002/2003) 3 Nevada Law Journal 196, 199-201 (outlining the growth of mediation in the US). 12 Jerold Auerbach, Justice Without Law? (Oxford University Press 1983) 123-126. 13 AT&T Mobility LLC v Concepcion 131 S Ct 1740 (2011); American Express Co. v Italian Colors Restaurant, 133 S.Ct. 2304 (2013); Paul Jammy, ‘Can arbitration clauses prevent class actions? The implications of AT&T Mobility LLC v Concepcion’ (2012) 86 Australian Law Journal 666. 14 Christopher Hodges, ‘Collective Redress in Europe: The New Model’ (2010) 29 (3) Civil Justice Quarterly 370, 372-373; Gerhard Wagner, ‘Collective Redress – Categories of Loss and Legislative Options’ (2011) 127 Law Quarterly Review 55, 56, 60. 15 Christopher Hodges, From class actions to collective redress: a revolution in approach to compensation (2009) 28(1) Civil Justice Quarterly 41, 41. 16 Christopher Hodges, The Reform of Class and Representative Actions in European Legal Systems (2008) Hart Publishing 3. 17 Christopher Hodges, From class actions to collective redress: a revolution in approach to compensation (2009) 28(1) Civil Justice Quarterly 41, 45.
5 | P a g e Michael Legg competition law areas.18 The latter having the enhancement of EU competitiveness as a central goal.19 There has also been a desire to look beyond courts and lawyers for a solution which has seen a focus on ADR and ‘consumer dispute resolution’ (CDR) – consumer to business dispute resolution procedures typified by external ombudsmen and inhouse customer dispute resolution schemes.20 Consequently Europe has adopted a three-pillar model: voluntary settlement through ADR and CDR, assistance from public regulators and court-based collective procedures. Voluntary settlement is the starting point and preferred path. Judicial supervision is available for unresponsive businesses or governments, or where the other pillars are inappropriate.21 The challenge for Europe now is to develop a coherent approach.22 Professor Hodges has devised a number of criteria that may be used for evaluating models of collective redress:23 To what extent does the model deliver justice? Does the model further the health and competiveness of the economy overall? Does the model remove illicit gains from infringers? Does the model restore the position of those who have been harmed by illegal activity? Does the model promote compliance in future behaviour by the infringer and others? Is the model accessible and simple to operate? Does the model operate acceptably speedily? Are the costs of the model low and proportionate to the amount involved? Does the model give rise to a risk of abuse?
A comparison of the US and European approaches demonstrates that the US allows and facilitates private litigation, mainly through the class action, to a much greater degree than Europe which favours a combination of private resolution outside the Courts where possible and a central role for regulatory authorities who can facilitate both CDR and court-based solutions.24
18 Christopher Hodges, The Reform of Class and Representative Actions in European Legal Systems (2008) Hart Publishing 4-5. 19 Christopher Hodges, From class actions to collective redress: a revolution in approach to compensation (2009) 28(1) Civil Justice Quarterly 41, 45. 20 Naomi Creutzfeldt, ‘The Origins and Evolution of Consumer Dispute Resolution Systems in Europe’ in Christopher Hodges and Astrid Stadler, Resolving Mass Disputes (Edward Elgar 2013) Ch 10. 21 Christopher Hodges, ‘Collective Redress in Europe: The New Model’ (2010) 29 (3) Civil Justice Quarterly 370, 374-375. 22 Rebecca Money-Kyrle and Christopher Hodges, ‘European Collective Action: Towards Coherence?’ (2012) 19 Maastricht Journal of European and Comparative Law 4. 23 Christopher Hodges, The Reform of Class and Representative Actions in European Legal Systems (2008) Hart Publishing 223-224. 24 Christopher Hodges, ‘Collective Redress in Europe: The New Model’ (2010) 29 (3) Civil Justice Quarterly 370, 390.
6 | P a g e Michael Legg The Organisation for Economic Co-operation and Development (OECD)
The OECD’s Committee on Consumer Policy (CCP) has been working in the area of dispute resolution and redress over a number of years. The OECD Guidelines for Consumer Protection in the Context of Electronic Commerce developed by the CCP in 1999 stressed the need for consumers to be provided with “meaningful access to fair and timely dispute resolution and redress without undue cost or burden”.25 Likewise, the 2003 OECD Guidelines for Protecting Consumers from Fraudulent and Deceptive Commercial Practice Across Borders called on member countries to include within their domestic frameworks “[e]ffective mechanisms that provide redress for consumer victims of fraudulent and deceptive commercial practice.”26
The OECD has argued:27 Fostering the development of effective, low cost ways for consumers to resolve their disputes and obtain monetary compensation for losses sustained is a key consumer policy objective. The particular features of consumer disputes require tailored mechanisms that can provide consumers with access to remedies that do not impose a cost, delay and burden disproportionate to the economic value at stake.
The OECD has recognised that alternative dispute resolution (ADR) can offer consumers a quick, effective and cheap way to obtain a remedy without the burden and expense of taking formal legal action.28 In relation to class actions it was observed:29 Collective action can be particularly useful in cases where large numbers of consumers have each suffered small losses. It offers an avenue for redress to consumers who, due to the low value of the claim, would not be willing to undertake the burden and cost of legal action individually. The threat of collective action lawsuits can also play an important role in regulating the marketplace, depriving defendants of ill-gotten gains and deterring future wrongful or irresponsible commercial behaviour. In this respect they serve a useful supplement to action by government consumer protection bodies.
The OECD has reported that a variety of entities and mechanisms have been developed in OECD countries for governmental enforcement of consumer protection laws. The mechanisms can be divided into conduct remedies and monetary remedies. Conduct remedies involve injunctions and cease-and-desist orders. Monetary remedies can include fines or civil penalties, which are intended to deter infractions of the law, and are paid to government. Monetary remedies may
25 OECD, OECD Guidelines for Consumer Protection in the Context of Electronic Commerce, 9 December 1999, principle VI. 26 OECD, OECD Guidelines for Protecting Consumers from Fraudulent and Deceptive Commercial Practice Across Borders, 11 June 2003, II. A. 4. 27 OECD, “OECD Workshop on Consumer Dispute Resolution and Redress in the Global Marketplace: Background Report” (2005) OECD Digital Economy Papers, No. 92, OECD Publishing. 28 OECD, “OECD Workshop on Consumer Dispute Resolution and Redress in the Global Marketplace: Background Report” (2005) OECD Digital Economy Papers, No. 92, OECD Publishing 15. 29 OECD, “OECD Workshop on Consumer Dispute Resolution and Redress in the Global Marketplace: Background Report” (2005) OECD Digital Economy Papers, No. 92, OECD Publishing 27.
7 | P a g e Michael Legg also include payments to consumers by way of reimbursement or compensation, but these have been less frequent in OECD countries. Australia and the United States being exceptions that had given regulators the ability to obtain redress for consumers.30
The OECD’s work on consumer redress culminated in the OECD Recommendation on Consumer Dispute Resolution and Redress which set out a number of recommendations including:31 Member countries should review their existing dispute resolution and redress frameworks to ensure that they provide consumers with access to fair, easy to use, timely, and effective dispute resolution and redress without unnecessary cost or burden. In so doing, Member countries should ensure that their domestic frameworks provide for a combination of different mechanisms for dispute resolution and redress in order to respond to the varying nature and characteristics of consumer complaints.
The OECD’s Recommendation is then divided between consumers acting individually, consumers acting collectively and the role of enforcement authorities. The recommendations on individual action focus on ADR and court procedures for small claims. In relation to collective action the OECD refers to a consumer, a consumer organisation or an enforcement agency acting as a representative party and states that “Member countries should ensure that the collective resolution procedures are transparent, efficient, and fair to both consumers and businesses”. The OECD also address the role of the private sector or business and recommends the adoption of internal complaints handling services and privately funded ADR services such as an ombudsman.
Australia
Australia, like the US and Europe, and consistent with the OECD Recommendation on Consumer Dispute Resolution and Redress has multiple mechanisms for redress, including a number of forms of ADR, regulatory litigation and class actions. Each of which is detailed further below as they relate to the Storm Financial dispute.
While the issue of redressing mass harm may once have been about the creation of mechanisms, the issue now is to understand the relative merits of the various mechanisms so as to determine if they operate symbiotically or can create costs, conflicts and inefficiencies. This has significance on a number of levels.
At the macro level of institutional design there are questions as to whether multiple procedures for seeking redress is desirable, or in economic terms, efficient. The OECD has expressly recommended a combination of different mechanisms. Europe is seeking to expand the range of mechanisms on offer. The US has accrued a range of mechanisms over time that has given rise to a debate about the effectiveness of public versus private enforcement. However, whether multiple mechanisms are desirable may depend on whether the mechanisms overlap, perform the same or different functions or whether they have distinctive attributes. Further, if multiple
30 OECD, “OECD Workshop on Consumer Dispute Resolution and Redress in the Global Marketplace: Background Report” (2005) OECD Digital Economy Papers, No. 92, OECD Publishing 32-33. 31 OECD, OECD Recommendation on Consumer Dispute Resolution and Redress, 12 July 2007.
8 | P a g e Michael Legg procedures exist should they be left to operate in their own silo or should there be some form of co-ordination which facilitates a matching between the consumer who has been affected by a particular mass harm and the procedures.
At the micro-level of particular disputes the existence of multiple avenues for redress means that disputants, potentially to be plaintiffs or defendants, but also regulators, have choices to make. These are choices for which they are likely to seek legal advice.32 The person or entity suffering harm will need to consider a number of matters such as cost, delay, the relief available and possibly other goals such as privacy or holding another responsible. Each of these matters may vary depending on the avenue for redress that is taken.
To evaluate the forms of redress available in Australia this paper adopts a case study approach33 and focuses on the collapse of Storm Financial. The case study is employed because the procedures for redress can be looked at in an actual setting which provides for greater detail and context. Often the litigation compared to ADR debate holds both options up as generic models with pre-ordained advantages and disadvantages. The Storm Financial case study involves ADR in the form of the institutionalised Financial Ombudsman Service, which contains within it a number of options, and the bespoke resolution scheme. Equally, litigation is viewed through the regulatory suits brought by ASIC and two class actions. A case study approach is limited in terms of extrapolation to other situations as the Storm Financial situation may be unique in some regards. Nonetheless, it does provide an actual scenario where multiple avenues for redress were implicated so as to allow for comparisons within the case study and evaluation of the mechanisms for redress by reference to outcome, cost, delay and efficiency.
Background to the Storm Financial Collapse
The Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services report commences its chapter on the collapse of Storm Financial as follows:34 The committee acknowledges the catastrophic effect that the collapse of Storm Financial has had on many investors, particularly those double-geared clients who were not afforded an opportunity to respond to margin calls; fell into negative equity; and were sold out of their portfolios in late 2008, at or near the bottom of the market. These
32 UNSW Law’s curriculum review in 2012 saw the adoption of a new core course Resolving Civil Disputes that has as a central focus the role of the lawyer in assisting the client to match disputes with procedures because of the existence of multiple avenues for redress. 33 The case study approach in evaluating collective address has been previously used. See Christopher Hodges, The Reform of Class and Representative Actions in European Legal Systems (2008) Hart Publishing which refers to 19 case studies and Deborah Hensler, Nicholas Pace, Bonita Dombey-Moore, Beth Giddens, Jennifer Gross and Erik Moller, Class Action Dilemmas (RAND Institute for Civil Justice 2000) which contains 10 case studies of US class actions. 34 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services (November 2009) 19. See also ASIC, Compensation for Retail Investors: the Social Impact of Monetary Loss – Report 240 (May 2011) 39-48 discussing the impact of list investments more generally by reference to financial, social and emotional effects.
9 | P a g e Michael Legg investors now face great challenges in meeting living expenses, repaying debts and, in some cases, keeping their homes. Storm Financial was one of the biggest financial planning networks in Australia, with 115 staff, $4.5 billion of funds under management and 14,000 clients at the time of its collapse. Storm Financial was formed on 23 May 1994, although it had existed in other incarnations dating back to the mid-1990s. The founders of Storm Financial were Emmanuel and Julie Cassimatis, who were also directors and joint Chief Executive Officers. Storm Financial convinced most of it clients to acquire significant debt, from various banks, to fund investments in the stock market. The Storm Financial model was a one-size-fits all approach with the majority of clients given the same advice regardless of their personal circumstances or needs.35 Typically these investors, who included retirees or people intending to retire in the near future, were encouraged to take out loans against the equity in their homes in order to generate a lump sum to invest in the share market. Clients were generally then advised to take out margin loans36 to increase the size of their investment portfolio. Storm Financial arranged home loans through a number of banks, and margin loans through mainly Colonial Geared Investments, which was wholly owned by the Commonwealth Bank of Australia (CBA), or through Macquarie Investment Lending. While Storm Financial was only a small source of revenue for the major banks there appears to have been a close relationship between local branches and Storm Financial. Concerns were also raised about bank procedures in relation to the completion of loan applications and valuation of assets. Margin loans were organised with a loan to value ratio (LVR) of around 80 per cent, with a buffer of 10 per cent. Storm clients were put into margin loan facilities with more generous LVR and buffer provisions than was the industry standard. The relevance of the LVR is that it determines the amount of the loan compared to the underlying collateral. Margin loans were relatively unregulated at the time and were not subject to regulation by ASIC.37 In some cases clients were encouraged to increase borrowings through applying for further margin loans or through revaluing property the subject of mortgages. The decline in the share market during September to December 2008 triggered numerous margin calls. A margin call means that either further collateral needs to be supplied or the securities purchased with the loan need to be sold to return the loan to the agreed LVR. The margin calls appear to have been mishandled but responsibility for this – the banks, Storm Financial or individual clients – has been disputed. In a rising market the leveraged investment strategy championed by Storm Financial magnified gains. The global financial crisis of 2008 saw stock market investments decline considerably
35 The one-size-fits all Storm Financial model is the subject of litigation in ASIC’s case against Mr and Mrs Cassimatis : see Australian Securities and Investments Commission v Cassimatis [2013] FCA 641, [95]. 36 Margin loans are a loan where securities or managed funds are used as collateral to be able to borrow funds for further investments, usually securities or managed funds. See ASIC’s Money Smart website: website: https://www.moneysmart.gov.au/investing/borrowing-to-invest/margin-loans 37 This has now changed see Corporations Act 2001 (Cth) s 761EA defining margin lending and s 764A(1)(l) making a margin lending facility a financial product which then triggers the requirements under Chapter 7.
10 | P a g e Michael Legg and margin calls be triggered that could not be responded to with the result that the collateral for the loans, including the family home, were lost or placed at risk. Storm Financial was placed in voluntary administration under Pt 5.3A of the Corporations Act 2001 (Cth) on 8 January 2009. Storm Financial’s bankers appointed receivers to take control of most of its assets on 15 January 2009. On 26 March 2009 the Federal Court of Australia ordered that Storm Financial be wound up.38 Bank Resolution Schemes
The CEO of CBA, Ralph Norris issued a press release on 17 June 2009 that stated:39 The Bank acknowledges that the position in which some Storm Financial clients find themselves, while not caused directly by the Bank, involves the Bank to some degree. “In some cases we have identified shortcomings in how we lent money to our customers involved with Storm Financial,” Commonwealth Bank CEO Ralph Norris said. “We are not proud of our involvement in some of these issues and we are working toward a fair and equitable outcome for our affected customers.” “Our customers can be assured that where we have done wrong, we will put it right. I am committed to the identification and resolution of all issues relating to the Bank’s involvement with Storm Financial,” he said. To proactively address the requests for compensation CBA and law firm Slater & Gordon created the Storm Resolution Scheme. A number of other banks such as the National Australia Bank and ANZ bank also negotiated resolution schemes with Slater & Gordon that were available to bank customers who alleged losses resulting from the collapse of Storm Financial. The details of the schemes are not publicly available.40 However, in relation to CBA the resolution scheme included the following elements:41 Payment by CBA of its client’s legal fees to a maximum of $5000;
CBA clients represented by 40 law firms independent of CBA;
Use of test cases to establish the principles for deriving settlement offers;
Disclosure of documents and facts about each claimant by CBA;
38 This summary is based on Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services (November 2009) Ch 3; Paul Barry, ‘In the Eye of the Storm: The Collapse of Storm Financial’, The Monthly, February 2011; Re Storm Financial Ltd (recs and mgrs apptd) (admin apptd) Australian Securities and Investments Commission (2009) 71 ACSR 81; Sherwood v Commonwealth Bank of Australia (No 4) [2013] FCA 1147, [3]. 39 CBA Media Release, Commonwealth Bank Statement – Storm Financial, 17 June 2009. See also Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services (November 2009) 45-46. 40 Duncan Hughes, ‘Storm compo deal stirs mixed response’, The Australian Financial Review, 24 February 2010 p 52. 41 Michael Legg, Case Management and Complex Civil Litigation (Federation Press 2011) 148-149.
11 | P a g e Michael Legg The assessment of the test cases by an independent panel composed of retired High Court judge, Ian Callinan, a retired Federal court judge, Roger Gyles and a barrister, Robert Gotterson QC (subsequently appointed to Queensland Court of Appeal); and
Financial and non-financial components were included in the resolution including adjusting home loan terms, writing off interest payments and providing permanent tenancies to allow claimants to stay in their homes.
Claimants being able to accept offers, make counter-offers, seek evaluation of an offer from the independent panel and reject an offer
Those claimants who settled under the scheme gave a release to CBA. However, the release contained what came to be called an “ASIC carve-out” clause, which enabled CBA customers to obtain the benefit of any compensation recovered by ASIC from CBA in relation to those Customers.42
Twelve months after the start of the resolution scheme more than 900 of the 1120 claims lodged with Slater & Gordon had been finalised, about 100 accepted that they had no claim and others were still going through the process.43 When completed the total monetary compensation paid was estimated to be about $132 million, but there were other benefits such as interest waivers, reduced interest rates and flexible payment arrangements provided under CBA’s hardship scheme.44
Financial Ombudsman Service
Each of the banks and Storm Financial held an Australian Financial Services Licence or AFSL. A condition of an AFSL is that the holder must provide a dispute resolution system that consists of:45 (a) an internal dispute resolution (IDR) procedure that covers complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence; and
(b) membership of one or more external dispute resolution (EDR) schemes.
42 Australian Securities & Investments Commission, ASIC and CBA Storm Financial settlement, 8 March 2013 pp 2-3, http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ASIC-and-CBA-Storm-financial- settlement-8-March-2013.pdf/$file/ASIC-and-CBA-Storm-financial-settlement-8-March-2013.pdf
12 | P a g e Michael Legg Both types of scheme must be approved by ASIC. One of the most well-known EDR schemes is the Financial Ombudsman Service (FOS) which began operating in 2008. FOS advised the Parliamentary Joint Committee on Corporations and Financial Services which conducted the inquiry into financial products and services, including the collapse of Storm Financial, that it had received disputes linked to the Storm Financial collapse.46 However, once Storm Financial was placed into liquidation FOS no longer had jurisdiction to receive further complaints but was able to consider disputes involving the banks.47
The operation of FOS is set out in its terms of reference (TOR).48 The TOR sets out the types of disputes that are within the jurisdiction of FOS. In summary, the FOS considers disputes between a financial services provider who is a member of FOS and individuals or small businesses and associations.49 FOS services are free to applicants as the costs of the service are met by financial services providers.50 The types of disputes that can be considered are those that arise from a contract or obligation arising under Australian Law and relate to the provision of a financial service (including credit transactions, loans, financial investments such as a security or an interest in a registered managed investment scheme or superannuation fund, financial or investment advice) by the financial services provider to the applicant.51 However, FOS's jurisdiction is limited to claims that do not exceed $500,000.52 FOS may also consider a dispute where all parties to the dispute and FOS agree.53
The types of remedies that the FOS may decide that the financial services provider or the applicant undertake include the payment of a sum of money, forgiveness or variation of the debt, repayment, waiver or variation of a fee, reinstatement or rectification of a contract.54 FOS may decide that the financial services provider should compensate the applicant for direct financial loss or damage. However, the monetary limit on awards that the FOS can make is $280,000 for most disputes. Prior to 1 January 2012, the limit for managed investments claims, stockbroking
46 Financial Ombudsman Service, Submission to Inquiry into Collapses in the Financial Services Industry (submission 353) 2. 47 FOS, Important Information regarding Storm Financial Limited (undated) http://www.fos.org.au/custom/files/docs/storm_financial_information_sheet.pdf
13 | P a g e Michael Legg claims, claims made in relation to securities and any derivative products and financial planning claims was $150,000.55
To resolve a dispute, FOS may use one or more of the following methods:56
(a) negotiation;
(b) conciliation or mediation; or
(c) deciding the dispute through making a Recommendation or a Determination utilising the process set out in paragraph 8 of the TOR.
When an application is lodged with FOS it will give the financial services provider an opportunity to resolve the dispute internally first before commencing its procedures.57 FOS operates on a "without prejudice" basis so that any information obtained through FOS may not be used in any subsequent court proceedings unless mandated by an appropriate court process.58
Where FOS is required to decide a dispute, that is make a Recommendation or a Determination, FOS will do so by reference to what in its opinion is fair in all the circumstances having regard to each of the following: legal principals, applicable industry codes or guidance as to practice, good industry practice, and previous relevant decisions of FOS or a predecessor scheme, although these decisions are not binding.59
The process for deciding disputes is that FOS makes an assessment referred to as a Recommendation. If both parties accept the Recommendation within 30 days of receiving it the dispute is resolved on the basis of that Recommendation. If within 30 days of receiving the Recommendation either the financial services provider does not accept the Recommendation or either party requests FOS to proceed to a Determination, FOS will proceed to a Determination by either an Ombudsman or by an FOS panel. A Determination is a final decision and is binding upon the financial services provider if the applicant accepts the Determination within 30 days of receiving the Determination.60 If an applicant does not accept a Recommendation or Determination the applicant is not bound by the Recommendation or Determination and may bring an action in the courts or take any other available action against the financial services provider.61
55 TOR Schedules 1 and 2. 56 TOR [7.1]. 57 TOR [6.3]. 58 TOR [7.6]. 59 TOR [8.2]. 60 TOR [8.5] and [8.7(b)]. 61 TOR [8.9].
14 | P a g e Michael Legg FOS is also obligated to report any ‘systemic, persistent or deliberate conduct’ that it identifies to ASIC.62 Systemic issues relate to issues that have implications beyond the immediate actions and rights of the parties to the complaint or dispute.63 This enables ASIC to become aware of matters that may impact multiple consumers. FOS will also take action to work with financial services providers to improve compliance, change culture and compensate consumers.64
ASIC Proceedings
Since 1 July 1998 ASIC’s functions have included acting as a consumer protection regulator in relation to the financial sector.65 ASIC has a range of enforcement options so as to protect consumers, ranging from criminal prosecutions to civil penalty proceedings, disqualification orders, infringements notices, enforceable undertakings and warnings.66 ASIC may also pursue redress for harmed consumers including seeking compensation, injunctions or other orders such as varying or voiding a contract, refund of money or return of property and awards of damages.67 This includes being specifically empowered to bring proceedings on behalf of a person or company to recover damages for fraud, negligence, default, breach of duty or other misconduct connected with the matter to which the investigation or examination related, or proceedings for recovery of property.68 ASIC’s broad mandate and limited resources may mean that compensation is not necessarily a high priority as it seeks to deter misconduct and educate the market place as to acceptable and illegal conduct.69 The collapse of Storm Financial implicated the provision of financial products and advice which was the subject of regulatory oversight by ASIC. ASIC formally commenced an investigation into Storm Financial from 12 December 2008 which became one of the largest investigations
62 TOR [11.2]-[11.3]; ASIC, Approval and oversight of external dispute resolution schemes: Regulatory Guide 139 (June 2013), [117]. See also Vicki Waye and Vince Morabito, ‘Collective Forms of Consumer Redress: Financial Ombudsman Case Study’ (2010) 12 (1) Journal of Corporate Law Studies 1, 4-5, 19-22. 63 ASIC, Approval and oversight of external dispute resolution schemes: Regulatory Guide 139 (June 2013), [119]. 64 Vicki Waye and Vince Morabito, ‘Collective Forms of Consumer Redress: Financial Ombudsman Case Study’ (2010) 12 (1) Journal of Corporate Law Studies 1, 20-22. 65 Robert Baxt, Ashley Black and Pamela Hanrahan, Securities and Financial Services Law (8th ed 2012 LexisNexis) [2.12]. 66 ASIC, Information Sheet 151 - ASIC’s approach to enforcement (September 2013); Robert Baxt, Ashley Black and Pamela Hanrahan, Securities and Financial Services Law (8th ed 2012 LexisNexis) [2.79]. 67 See eg Corporations Act 2001 (Cth) ss 1317HA/1317J (compensation orders for breach of financial services civil penalty provision); 1324 (statutory injunctions), s 1325 (other orders) and Australian Securities and Investments Commission Act 2001 (Cth) s 12GM (other orders). 68 Australian Securities and Investments Commission Act 2001 (Cth) s50. 69 ASIC, Information Sheet 151 - ASIC’s approach to enforcement (September 2013) 6 (“We will ordinarily only take action to recover damages or property on a person’s behalf if this would be in the public interest, beyond the interests of the affected consumers. We encourage investors to consider alternative options to recover damages or property from wrongdoers where possible, such as by lodging a dispute with the Financial Ombudsman Service or taking private legal action.”).
15 | P a g e Michael Legg ASIC had ever undertaken.70 ASIC acted on its investigation by bringing a number of proceedings – some protective, some to deter and some to seek compensation. Freezing Dividends and Winding Up Storm Financial
The redress of mass harm often focuses on compensation for those harmed. However, where entities are insolvent or funds may be dissipated or moved out of the jurisdiction it is necessary to take protective or preventive steps. ASIC is given wide powers to pursue such steps.71
On the 15 December 2008 Storm Financial paid a dividend of $2 million to Emmanuel Cassimatis and Associates Pty Ltd. ASIC commenced court action which resulted in the $2 million held by Emmanuel Cassimatis and Associates Pty Ltd being temporarily frozen and which seeks the repayment of the funds to Storm Financial.72 As part of the voluntary administration referred to above Mr and Mrs Cassimatis proposed a deed of company arrangement (DOCA) whereby the $2 million would be advanced to the administrators and the funds would be used to fund litigation against CBA by Storm Financial and its clients. The DOCA would also grant releases to Mr and Mrs Cassimatis. The administrators recommended against acceptance of the DOCA due to uncertainties around whether the $2 million would be available and due to excessive control vesting with Mr and Mrs Cassimatis. ASIC also applied to the Federal Court for the winding up of Storm Financial either on the basis of insolvency,73 or on the basis that it was just and equitable that the company be wound up.74 The just and equitable ground includes, where an application is brought by a public authority, that it is in the public interest that a company be wound up.
Logan J found that it was just and equitable that Storm should be wound up as there was an “overwhelming public interest” in an inquiry as to whether there is any merit in claims against Storm Financial, its directors or fund managers. His Honour further observed that “[i]n a case like this [the public] interest is much wider than the interests of creditors and extends to a prompt and certain placement of this company in the hands of liquidators for the wider good of the financial system”.75
70 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services (November 2009) 48; ASIC, Overview of ASIC's Storm Website https://storm.asic.gov.au/
16 | P a g e Michael Legg Civil penalty / Disqualification proceedings against the Cassimatises
At its meeting on 24 November 2010 the Commission decided that ASIC would bring civil penalty proceedings against Emmanuel and Julie Cassimatis as directors of Storm. On 21 December 2010 ASIC filed proceedings in the Federal Court of Australia against Emmanuel Cassimatis and Julie Cassimatis alleging that they breached their duty as directors of Storm Financial (s 180 of the Corporations Act 2001 (Cth)) by causing and permitting Storm Financial to be exposed to legal liability arising from the implementation of a financial services business model (Storm Model) which involved providing financial advice to investors that failed to take into account the personal circumstances of individual investors.76
ASIC’s case is that the Storm model caused Storm Financial to:77 breach its responsibilities to provide: o efficient, honest and fair financial services (s 912A of the Corporations Act 2001 (Cth)), and o advice that is tailored to an individual’s circumstances (s 945A of the Corporations Act 2001 (Cth)), (because the Storm model involved clients receiving the same commoditised advice, that did not differentiate between clients' individual circumstances); provide false and misleading information in the statements of advice issued to Storm’s clients (s 1041E of the Corporations Act 2001 (Cth)); and provide negligent financial advice to its clients and to breach its contractual duties to exercise reasonable care and skill in providing financial advice to its clients.
ASIC’s pleadings indicate that to prove the above contraventions it will lead evidence in relation to 77 individuals who were Storm clients and together received financial advice on more than 200 occassions.78
The relief sought by ASIC is:79 Emmanuel and Julie Cassimatis pay a penalty for each instance where they are found to have breached their duties as directors of Storm. The amount for each breach is a matter to be determined by the Court and can be up to $200,000 both Emmanuel and Julie Cassimatis be disqualified from managing a company for a period that the Court thinks fit; and
76 Australian Securities and Investments Commission v Cassimatis [2013] FCA 641, [5], [95]; ASIC, Civil penalty proceedings against the Cassimatises https://storm.asic.gov.au/storm/storm.nsf/byheadline/Cassimatis%20civil%20penalty%20proceeding?opendocument
17 | P a g e Michael Legg both Emmanuel and Julie Cassimatis be prevented from holding an Australian financial services license, or from providing financial services in Australia, for a period that the Court thinks fit.
The role of a pecuniary penalty is principally to act as a personal and general deterrent to prevent the corporate structure from being used in a manner contrary to commercial standards.80 The purpose of a disqualification order is to both protect the public but also to punish the defendant and deter repetition of like conduct.81
In the event that ASIC is successful in this proceeding, any penalties paid by the Cassimatises will be paid to the Commonwealth Government and not be available as compensation for the former clients of Storm Financial.
Compensation proceedings against Banks
ASIC’s 24 November 2010 meeting also resulted in a decision to commence proceedings against CBA, Bank of Queensland Limited (“BoQ”) and Macquarie Bank Limited (“MBL”) seeking compensation for investors arising out of the collapse of Storm.82
On 22 December 2010 ASIC filed proceedings in the Federal Court of Australia against BoQ, the owner and franchisee of the BoQ's North Ward branch (Senrac Pty Limited (Senrac)) and MBL. These proceedings are brought by ASIC in its own name and, pursuant to the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) ss 12GM and 50, on behalf of two former Storm investors (Barry and Deanna Doyle). In these proceedings ASIC alleged causes of action against BoQ and MBL based on:83 breach of contract: The 2004 Banking Code of Conduct formed part of BoQ’s home loan contracts and the 1993 Banking Code of Conduct formed part of Macquarie’s margin loan contracts. ASIC alleges that as both BoQ and Macquarie failed to comply with the Banking Code of Conduct, they breached their loan contracts with these two investors; unconscionable conduct: ASIC alleges that BoQ and Macquarie were aware of enough facts about the investors to know they were in a position of disadvantage, and in that situation BoQ and Macquarie's conduct was unconscionable (ss 12CA, 12CB, 12CC of the ASIC Act, ss51AA, 51AB, 51AC of the Trade Practices Act 1974 (Cth) and s 39 of the Fair Trading Act 1989 (Qld)); and liability as linked credit providers of Storm under s73 of the Trade Practices Act 1974 (Cth): ASIC alleges that BoQ and Macquarie were ‘linked credit providers’ of Storm and therefore are jointly liable with Storm for loss and damage suffered by the two investors.
80 Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80; 20 ACLC 1146; [2002] NSWSC 483, [126]. 81 Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; (2004) 209 ALR 271, [56]; Australian Securities and Investments Commission v Beekink (2007) 61 ACSR 305; [2007] FCAFC 7. 82 Australian Securities and Investments Commission v Bank of Queensland Ltd [2011] FCA 1361, [26]. 83 Australian Securities and Investments Commission v Bank of Queensland Ltd [2011] FCA 1361, [4], [9]- [13].
18 | P a g e Michael Legg The case against Senrac is based on its involvement in BoQ’s alleged contraventions.
The relief sought by ASIC in these proceedings includes declarations of unconscionable conduct, statutory and common law damages and compensation orders, and orders setting aside various loan transactions and securities.84
These proceedings were settled, without admission, by BOQ, Senrac and MBL who agreed to pay $1,100,000, which fully compensated Barry and Deanna Doyle for their financial loss arising from their Storm investments.85
On 22 December 2010 ASIC filed proceedings in the Federal Court of Australia alleging that the conduct of the Storm Model amounted to the operation of a managed investment scheme that was required to be registered under the Corporations Act 2001 (Cth) and was not registered in contravention of s 601ED(5). In these proceedings ASIC is alleging that Storm Financial operated the managed investment scheme and that CBA, BoQ and MBL were knowingly concerned in the operation of that managed investment scheme.86 These proceeding are referred to as ASIC’s Unregistered managed investment scheme or UMIS proceedings.
ASIC’s plan was to adopt a staged approach to proceedings in relation to the alleged scheme. The relief sought by ASIC in the first instance include declarations as to the operation of the managed investment scheme by Storm and that each of CBA, BoQ and MBL were knowingly concerned in its operation. ASIC stated that if the claims were successful, ASIC was likely to then seek orders for the payment of compensation to investors pursuant to s 1325 of the Corporations Act 2001 (Cth).87 However, in response to summary judgment and strike out applications by the banks the proceedings were recast so as to seek an injunction pursuant to s 1324 of the Corporations Act 2001 (Cth), which would also provide the basis for seeking a declaration under s 21 of the Federal Court of Australia Act 1976 (Cth).88
On 14 September 2012, ASIC entered into a settlement agreement with CBA, for CBA to make available up to $136 million as compensation for losses suffered on investments made through Storm. On 17 September 2012, ASIC's proceedings against CBA were dismissed by the Court.89
84 Australian Securities and Investments Commission v Bank of Queensland Ltd [2011] FCA 1361, [4], [9]- [13]. 85 ASIC Media Release, 13-122MR - ASIC settles in Storm Financial proceedings, 29 May 2013. 86 Australian Securities and Investments Commission v Storm Financial Ltd (in liq) (No 2) [2011] FCA 858, [2], [4]. 87 Australian Securities and Investments Commission v Storm Financial Ltd (in liq) (No 2) [2011] FCA 858, [4]; ASIC, ASIC actions, https://storm.asic.gov.au/storm/storm.nsf/byheadline/ASIC%20actions?opendocument
19 | P a g e Michael Legg
Class Actions
The legislation creating group proceedings in Australia at the federal level is Pt IVA of the Federal Court of Australia Act 1976 (Cth), which was enacted in 1992. A class action brought under this legislation usually has three hurdles to overcome: complying with the requirements for commencing the proceedings in s 33C; complying with the additional pleading requirements in s 33H; and avoiding being discontinued pursuant to s 33N. These requirements have been discussed at length on a number of occasions.90 In short, to commence proceedings there must potentially be seven or more persons with claims against the same person and those claims are in respect of, or arise out of, ‘the same, similar or related circumstances’. The claims do not need to be identical and can include differences as shown by the use of the term ‘related’.91 Each of the claims must ‘give rise to a substantial common issue of law or fact’ which has been interpreted by the High Court as not indicating a large or significant issue but instead is directed to issues which are ‘real or of substance’.92 The pleading in a class action must describe or otherwise identify the group members and specify the common questions of law or fact, in addition to complying with the usual pleading requirements. Even where the requirements for a representative proceeding are satisfied the court has a discretion upon its own motion or on application by the respondent under s 33N to terminate the class action where the court is satisfied that it is in the interests of justice to do so because, inter alia, the action would be less efficient than separate proceedings or where it is ‘otherwise inappropriate that the claims be pursued by means of a representative proceeding’. Similar legislation and requirements exist in Victoria and New South Wales.93
The objective of class action litigation when introduced into the Federal Court was to provide access to justice, to resolve disputes more efficiently, to avoid respondents facing multiple suits and the risk of inconsistent findings, and to reduce costs for the parties and the courts.94 More recently the federal government has stated that it ‘supports class actions and litigation funders as they can provide access to justice for a large number of consumers who may otherwise have difficulties in resolving disputes’.95
litigation with ASIC, 14 September 2012 https://www.commbank.com.au/about-us/news/media- releases/2012/140912-cba-settles-storm-financial-litigation-ASIC.html
20 | P a g e Michael Legg Two class actions pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth) were commenced against banks as a result of the Storm Financial collapse: Richards v Macquarie Bank Limited (QUD 590 of 2010) which was commenced on 24 December 2010 and Sherwood v Commonwealth Bank of Australia and Colonial First State Investments Limited (NSD 811 of 2010) which was commenced on 1 July 2010.96
The Richards class action involved a group of about 1050 members, who on advice from Storm Financial, borrowed money in the form of margin loans from MBL between 15 February 2005 and 31 October 2008, and then used that money to invest in one or more of nine managed investment schemes and had those investments redeemed or sold in or after October 2008, sued MBL for their losses. The causes of action were similar to those contained in the ASIC proceedings above, namely unregistered managed investment scheme (although with MBL as a participant as well as an accessory), breach of contract, unconscionable conduct and the linked credit provider claim. MBL settled the proceedings for $82.5 million (or 30.57% of the losses claimed) subject to court approval.97
As part of the court approval, the applicant sought a funder’s premium of 35% for those group members who co-funded the litigation. This meant that group members who contributed to the legal costs and disbursements involved in running the class action recovered 42% of their losses, while those who did not contribute only recovered 17.602% of their losses. The percentage used was determined by reference to the range of premiums that third party litigation funders had been willing to fund class actions.98 Due to the novel nature of the funder’s premium ASIC intervened in the proceedings.99 At first instance the settlement was approved.100 ASIC appealed.
The Full Federal Court in Australian Securities and Investments Commission v Richards [2013] FCAFC 89 overturned the settlement and the 35% uplift in recovery for group members who self-financed the cost of prosecuting their class action.101 A further settlement, without a funder’s premium, was approved on 13 December 2013.102
96 Federal Court of Australia, https://www.comcourts.gov.au/file/Federal/P/QUD590/2010/actions and https://www.comcourts.gov.au/file/Federal/P/NSD811/2010/actions
21 | P a g e Michael Legg The Sherwood proceedings were brought by Mr and Mrs Sherwood and Mr and Mrs McArdle who were former clients of Storm Financial and borrowed money from CBA through margin loan agreements on or after 18 May 2007. The funds were then invested in funds or other securities approved by CBA. Some of the approved funds were managed by Colonial First State Investments Limited (CFS), a wholly-owned subsidiary of CBA. The investments were redeemed or sold between about October and December 2008. The causes of action were similar to those contained in the ASIC proceedings above, namely unregistered managed investment scheme (although with CBA as a participant as well as an accessory and CFS as an accessory), breach of contract, unconscionable conduct and the linked credit provider claim but added misleading conduct.103 The group definition excluded those persons who had previously settled their claim with CBA.104 CBA cross claimed against the McArdles in relation to unpaid amounts on their margin loan and home loan.
Joint Case Management and Trial
ASIC’s UMIS proceedings and the two class actions involved the same allegations in substance. As a result His Honour Justice Reeves in the Federal Court in Brisbane determined that the three proceedings would be case managed together with a view to conducting a joint trial.105 As part of case management the parties were required to ascertain the extent of overlap between the three proceedings by specifying who were potential group members in a class action and who may seek to have ASIC utilize section 1325 of the Corporations Act 2001 (Cth) to obtain compensation for them. The finding was as follows:106 2,099 customers of the CBA invested in a Storm Scheme, 467, or 22.2%, were potential members of the Sherwood class action and the balance of 77.8% were persons who may seek to apply under s 1325. all but one of the 1,060 customers of Macquarie Bank who invested in a Storm Scheme were potential members of the Richards class action and there was, therefore, only one Investor who may seek to apply under s 1325. the BOQ was not a defendant in any class action proceeding, all of its 502 customers who invested in a Storm Scheme were persons who may seek to apply under s 1325. However, as referred to above, ASIC amended its UMIS proceedings so as to proceed on the basis of s 1324 rather than s 1325. This caused Reeves J to observe that the above overlap
103 Sherwood v Commonwealth Bank of Australia (No 3) [2012] FCA 1149, [7]-[9]; Sherwood v Commonwealth Bank of Australia (No 4) [2013] FCA 1147, [5]. 104 Sherwood v Commonwealth Bank of Australia, Amended Application NSD 811/2010 dated 16 December 2011. 105 Australian Securities and Investments Commission v Storm Financial Ltd (Receivers and Managers Appointed) (In Liq) [2011] FCA 763, [5]-[6]; ASIC, Proceedings against Commonwealth Bank of Australia Limited, Bank of Queensland Limited and Macquarie Bank Limited – unregistered managed investment scheme https://storm.asic.gov.au/storm/storm.nsf/byheadline/UMIS%20proceedings?opendocument
22 | P a g e Michael Legg between the UMIS proceedings and the class actions ceased to exist, but that a number of common issues remained.107
The combined trial commenced on 24 September 2012. However, on 9 November 2012 the Sherwood class action was adjourned and the proceedings were allocated a date for trial from 4 to 28 March 2013. The trial of the UMIS proceedings and the Richards class action continued and concluded on 12 December 2012 with closing submissions being made in February 2013. The Sherwood class action trial commenced on 4 March but continued well past March 2013 with hearings continuing into July 2013. Final oral submissions were set down for 5 days commencing 4 November 2013.
ADR, Class Actions and Regulatory Litigation Compared
Outcome/Effectiveness
From the consumer’s perspective it is to be expected that the choice of dispute resolution mechanisms will be a cost-benefit analysis: what mechanism is most likely to provide the greatest compensation relative to its cost. Where non-monetary relief is sought the comparison may be more difficult. Injunctions and declarations necessitate access to the courts. More flexible outcomes such as varying contractual terms may be achieved through ADR, either by way of FOS or the settlement schemes, or as part of court-based remedies pursuant to provisions such as s 1325 of the Corporations Act 2001 (Cth) or s 12GM of the ASIC Act.
Some consumers may wish to strictly enforce their legal rights or have actions they regard as misconduct dealt with in a public forum. There is a need for accountability and transparency, or simply maximising recovery. If a binding precedent, public recognition of rights or deterrence of conduct is desired then this may lead to a preference for regulatory litigation or class actions.108 However, it must be remembered that litigation often settles, in which case there is neither a judgment nor a precedent. Yet other consumers may have a greater concern about other values or interests such as participation and empowerment, or speed and certainty and prefer to avoid a drawn out dispute or the risk of being unsuccessful.109
A comparison of outcomes in relation to Storm Financial is fraught with difficulty as it cannot be assumed that the merits of each claim are the same which then translates into different prospects of success. Nonetheless, the comparison of proceedings or claims that have been finalized reveals the picture that is set out in Table 1.
107 Australian Securities and Investments Commission v Storm Financial Ltd (Receivers and Managers Appointed) (In Liq) [2011] FCA 763, [54]. 108 See eg Michael Legg and Sera Mirzabegian, ‘Appropriate Dispute Resolution and the Role of Litigation’ (2013) 38 (1) Australian Bar Review 55, 57-61; ASIC, Compensation for Retail Investors: the Social Impact of Monetary Loss – Report 240 (May 2011) 35. 109 See eg Carrie Menkel-Meadow, ‘Whose Dispute Is It Anyway?: A Philosophical and Democratic Defense of Settlement (In Some Cases)’ (1995) 83 Georgetown Law Journal 2663, 2669-2670; ASIC, Compensation for Retail Investors: the Social Impact of Monetary Loss – Report 240 (May 2011) 34.
23 | P a g e Michael Legg Table 1 Outcomes
Dispute Resolution Mechanism Outcome
Bank Resolution Scheme and ASIC UMIS Before ASIC settlement – 28% of losses recovered proceedings against CBA After ASIC settlement - 55% of losses recovered
Both based on ASIC financial model.
Non-financial benefits also provided.
Doyle proceedings brought by ASIC 100% of losses recovered
Richards class action against MBL 30.57% of losses recovered albeit after ASIC intervened to have the Full Federal Court overturn the funders premium
26% based on ASIC financial model.
Financial Ombudsman Service Outcomes are confidential.
These outcomes have been the subject of comment by both ASIC and the lawyers acting in the Richards class action. The settlement between ASIC and CBA in relation to the UMIS proceedings which resulted in the Bank Resolution scheme settlements increasing for some persons was the subject of a letter-writing campaign. The letters asked whether the settlement that ASIC had negotiated was a better outcome than what could be achieved in the class action.110 ASIC’s response to the letters provides further information as to the relative outcomes of the regulatory proceedings and the class action. In summary, ASIC retained forensic accounts who created a financial model of the losses that Storm’s customers’ suffered and allocated those losses to each bank based on the bank being the source of the funds invested with Storm Financial.111 The model calculated that Storm investors who borrowed from CBA suffered losses of $478 million of which $373 million was attributed to CBA. The funds for compensation provided by CBA amounted to $268 million or 72% of $373 million. However, as the Bank Resolution Scheme provided compensation on a different basis to ASIC’s model some of the Storm investors who had settled earlier recovered an amount greater than the 55% referred to above. The 55% recovery therefore became the minimum recovery for a Storm investor who
110 ASIC, ASIC responds to Storm investors' queries regarding the ASIC-CBA settlement https://storm.asic.gov.au/storm/storm.nsf/byheadline/ASIC-responds-to-Storm-investors-queries-regarding-the- ASIC-CBA-settlement?opendocument
24 | P a g e Michael Legg had borrowed funds from CBA but for some it would be a higher amount.112 All of these figures are subject to ASIC’s model being a correct approximation of both total loss and the amount of the loss attributed to each Bank.
The ASIC model, the settlement of the Doyle proceedings and the Richards class action sparked another round of comparisons. In the media release that followed the settlement of the Doyle proceedings ASIC noted that the proceedings had provided a template for similar allegations to be raised in the Richards and Sherwood class actions but that the settlement in achieving full recovery for the Doyles was a better result than the Richards class action.113 The judge that approved the Richards class action recorded that the settlement achieved a recovery of 30.57%.114 The ASIC model calculated that those who borrowed from MBL suffered losses of $340 million of which $278 million was attributed to MBL. When the Richards settlement less legal costs, an amount of $72.7 million, is compared with $278 million it gives a recovery of 26%.115
The Doyle recovery may have been driven by a number of circumstances. It may have been a strong case with high prospects of success. Indeed the law firm that represented the applicant in the Richards class action has stated that the Doyle case was at the extreme end of imprudent banking practice.116 Equally it may have been that the respondents wanted to avoid the risk of the creation of an unhelpful precedent. The Doyle case did raise the novel issue of the linked credit provider.
The comments about the difference in prospects between the Doyle proceedings and the Richards class action raises for consideration whether the class action has an averaging effect. A level of cohesiveness amongst the claims is required for a class action, but it is not a requirement that all claims have the same or similar prospects of success. Consequently group members with weak claims can be aggregated together with those having strong claims. It has been observed that under such conditions, the terms negotiated to settle class actions may bear little resemblance to a result consistent with the merits of the dispute at issue.117 The combination of strong and weak claims in a class action may work to increase the amount the defendant pays to
112 ASIC, ASIC responds to Storm investors' queries regarding the ASIC-CBA settlement https://storm.asic.gov.au/storm/storm.nsf/byheadline/ASIC-responds-to-Storm-investors-queries-regarding-the- ASIC-CBA-settlement?opendocument
25 | P a g e Michael Legg holders of weak claims.118 Class action settlements can also reduce the payments to group members with strong claims. However, the settlement allocation process should take account of the relative strength of the claims combined in the class action.119
Despite the excellent outcome for the Doyles there remains a further question as to whether ASIC should have brought the case on behalf of more consumers, or should have sought to take the matter to trial so as to obtain a judgment which would create a precedent. A number of observations may be made. The Doyles proceeding, even without going to trial, provided direction for other consumers as shown by the class actions including the same causes of action. ASIC could have included further consumers but this may have weakened the case and made it more costly to prepare. Indeed claims based on unconscionable conduct, for example, focus heavily on the circumstances of the applicant as some special disadvantage must exist at common law or through reference to the legislative factors that the Courts may consider.120 In other cases brought by ASIC, the courts have suggested that ASIC is best served by a clear, narrow case.121 Lastly, the idea that ASIC should have refused a settlement offer for complete recovery may have created a divergence of interests with the Doyles who were being offered full compensation. Although ASIC was funding and directing the case it was the Doyle’s financial future that hung in the balance. The public interest may have weighed in favor of ASIC continuing but the same claims were being pursued in the class actions. Clearly a number of factors needed to be weighed.
The snapshot of outcomes in relation to Storm Financial suggests that ASIC has played a key role in ensuring meaningful compensation for consumers. It must be remembered that ASIC does not pursue compensation on a regular basis. ASIC’s submission to the Senate Inquiry into the performance of ASIC states: “ASIC’s regulatory role does not involve preventing all consumer losses or ensuring full compensation for consumers in all instances where losses arise”.122 ASIC’s Information Sheet 151 encourages investors to consider alternative options to recover damages or property from wrongdoers where possible, such as through FOS or by taking private legal action.123 The ASIC Chairman has embraced class actions as a source of
118 Darwalla Milling Co Pty Ltd v F Hoffman-La Roche Ltd (No 2) (2006) 236 ALR 322, [66] and Joseph Grundfest and Michael Perino, “The Pentium Papers: A Case Study of Collective Institutional Investor Activism in Litigation” (1996) 38 Arizona Law Review 559, 571-572. 119 Peterson v Merck Sharp & Dohme (Aust) Pty Ltd (No 6) [2013] FCA 447, Michael Legg, ‘Class Action Settlement Hurdles’ (2013) 2 Journal of Civil Litigation and Practice 131, 139. 120 See eg Louth v Diprose (1992) 175 CLR 621, 637; Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90, [24]-[25]; Trade Practices Act 1974 (Cth) s 51AB, now Australian Consumer Law ss 21, 22. 121 ASIC v Rich (2009) 75 ACSR 1, [25], [65]; ASIC v Macdonald (2009) 256 ALR 199, [1265]-[1266]; Forrest v ASIC (2012) 247 CLR 486, [27]. See also John Halley SC, ‘The Civil Litigation Route’, Regulation, Litigation and Enforcement, UNSW Law, 26 September 2013, 37-40. 122 ASIC, Senate inquiry into the performance of the Australian Securities and Investments Commission - Main submission by ASIC (October 2013) [50]. However see [82] for a list of ASIC’s top 10 compensation outcomes. 123 ASIC, Information Sheet 151 - ASIC’s approach to enforcement (September 2013) 6.
26 | P a g e Michael Legg compensation.124 Nonetheless, the Storm Financial litigation suggests that ASIC could do much more in terms of compensation if it chose to. It also raises for consideration that consumers who need to decide whether to use a particular procedure for redress would benefit from knowing whether ASIC is going to seek compensation for consumers. ASIC needs to weigh a number of factors in determining which enforcement tool to use, which although necessary, can give rise to a perception of inconsistency and create uncertainty for consumers. Equally, ASIC’s oversight of the Bank Resolution Scheme and intervention in the Richards class action settlement may be a way forward by providing a level of independent scrutiny as to whether the terms of compensation are fair or adequate.
Despite ASIC’s active role in relation to Storm Financial, class actions, particularly with the aid of litigation funding, have been welcomed as providing compensation where otherwise there may have been none.125 Equally concerns have been raised about the proportion of compensation compared to losses.126 The compensation achieved through a class action settlement will be the result of a number of factors, such as, strength of the case, uncertainty in the law, uncertainty in the facts, delay if trial of the common issues and then sub-groups or individual issues is need, funds available for settlement. The averaging effect discussed above will also apply. Consequently, a discount on full recovery is to be expected as the price for avoiding the risk of a party being unsuccessful and not incurring further costs related to the litigation. The outcomes in table 1 suggest that the class action and the Bank resolution scheme prior to ASIC’s UMIS settlement with CBA were about the same. It should be noted that MBL clients may not have had the option of using an ADR scheme created by MBL. Nonetheless, the recoveries were about 30% or one-third of the losses claimed. This may be a fair outcome. Indeed in the Richards class action the Federal Court in approving the revised settlement had to reach that conclusion for approval to be given.127 However, it still raises many questions about the effectiveness of the class action in securing redress. Is it a case of 30% is better than nothing? Or does the class action leave some, maybe all, consumers short-changed?
The ADR picture is unclear because of a lack of information about whether FOS was used by consumers and the outcomes achieved. The Bank resolution scheme ultimately delivered a better result than the class action, but if ASIC had not intervened the outcomes would have been
124 See Alex Boxsell, ‘Regulators praise private court actions’, The Weekend Australian Financial Review, 5-9 April 2012 p 59 (reporting on the Chairman of ASIC stating that if a class action was likely to seek compensation then ASIC would use its resources elsewhere). See also Michael Legg, ‘ASIC’s nod to class actions may backfire’, The Australian, 12 April 2012 p 24. 125 Vicki Waye and Vince Morabito, ‘Collective Forms of Consumer Redress: Financial Ombudsman Case Study’ (2010) 12 (1) Journal of Corporate Law Studies 1, 10; Michael Legg, "Class Actions and Regulating Culture in Financial Organisations: Observations from a Comparison of US and Australian Bank Class Actions" in Justin O'Brien and George Gilligan (eds), Integrity, Risk and Accountability in Capital Markets (Hart 2013) 247. 126 Michael Legg, ‘The Price of Settlement? The Centro Class Action and the Divide Between Private and Public Enforcement’, Centre for Law Markets and Regulation, UNSW, 9 May 2012 and Michael Legg, ‘It’s About Money, Not Morality: How to Assess Shareholder Class Actions’, Centre for Law Markets and Regulation, UNSW, 4 December 2012. 127 See Federal Court of Australia, Practice Note CM17 - Representative proceedings commenced under Part IVA of the Federal Court of Australia Act 1976 (Cth), 9 October 2013, [11.1].
27 | P a g e Michael Legg similar in terms of result, although non-financial benefits were also provided. The Storm Financial case study shows that even though ADR may be about compromise, it can deliver similar outcomes to litigation. Issues of cost and delay are discussed below.
It is also useful to consider the outcomes from the perspective of the Banks who were the subject of the claims. The Doyle and class action settlement achieved finality, albeit at different prices. The class action in particular was conducted on an opt-out basis so that all consumers who met the group definition were included in the proceedings, and subsequent settlement, unless they chose to actively exclude themselves.128 The advantage of the Bank resolution scheme for CBA was explained by one journalist as being that it drew “much of the political heat, the consumer anger and reputational damage from the issue and contained the final costs to a few hundred million”.129 However, the resolution scheme did not prevent ASIC from commencing legal proceedings against CBA, and investors who participated in the resolution scheme were able to benefit from the increased compensation that ASIC secured.130 Class actions were also able to be commenced on behalf of those CBA clients that had not entered into settlement agreements through the resolution scheme which contained clauses that barred further proceedings. It seems that the resolution scheme did not give CBA the finality it would have liked nor capped costs and compensation amounts within a relatively short time frame. However, the proactive nature of the resolution scheme does appear to have assisted in limiting reputational damage and fostering positive client relationships.
Cost
Costs in litigation usually fall into two categories. First, a plaintiff’s own legal costs paid to their lawyer and disbursements such as filing fees and expert witness fees. Second, their opponent’s costs if they are unsuccessful and are required to pay an adverse costs order. The person liable for these costs varies depending on the mechanisms for redress that are employed.
Where the state through a regulator brings the litigation it is the regulator who incurs the legal costs and risk of an adverse costs order, even when compensation is sought for particular persons.131 Class actions operate within the above system of costs but it is usually the representative party alone that is liable for these costs and not group members.132 However, third party litigation funding may contractually change this dynamic. Usually the funder pays the first
128 Richards v Macquarie Bank Ltd (No 5) [2013] FCA 1442, [35]. 129 Duncan Hughes, “Two ways of tackling Storm damage”, The Australian Financial Review, 26 June 2009 p58. 130 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services (November 2009) 49. 131 Where ASIC relies on s 50 of the ASIC Act it requires the consent of the persons it is bring the action on behalf of which provides an opportunity for costs to be addressed, usually on the basis that the person is not liable for either category of costs discussed above. A person entering into a s 50 arrangement may seek their own legal advice which will come at a cost. 132 See eg Federal Court of Australia Act 1976 (Cth) s43(1A). Group members can become liable for costs if they become a representative of a sub-group or seek the determination of an individual issue: Federal Court of Australia Act 1976 (Cth) ss 33Q and 33R.
28 | P a g e Michael Legg category of cost but all participants agree to reimburse the funder for those costs if the class action is successful, and removes the second category of cost through indemnifying all participants in the class action against an adverse cost order. However, utilising litigation funding will involve paying a percentage of any recovery to the funder.133 As litigation funding is a contractual arrangement variations on the usual approach may occur. For example no indemnity for an adverse cost order may be provided.134 Class actions, due to their aggregative and representative character, create a number of additional costs such as notices, additional hearings for approval of notices and settlements, and distribution of settlements.
In the Richards class action some, but not all, of the group members funded the litigation, meaning they paid the legal costs and disbursements. The group members in the Richards class action were not at risk of an adverse cost order, only the applicant was, due to the operation of the class actions legislation. No indemnity from the funding group members existed.
A person using ADR may avoid both of the above categories of costs, unless legal representation is obtained so that legal costs and disbursements are incurred. Even then the legal advisers may act on a 'no win - no fee' basis so that there must be some recovery before the costs become payable. The costs of the ADR process, such as mediator fees and room hire, will usually be shared between the parties but other arrangements can be agreed. Under FOS the procedures employed are free of charge to the claimants. As a result a claimant may incur the costs of legal advisers but does not incur the cost of a mediator and associated expenses such as room hire. The Storm Resolution Scheme involved no costs for participants unless they expended greater than $5000 on legal representation.
Table 2 Costs
Form of Dispute Resolution Consumer’s Financial Costs if Consumer’s Financial Costs if Successful Unsuccessful
Regulator initiated Litigation No cost to consumer No cost to consumer
(Doyle and UMIS) ASIC bears costs. ASIC bears costs.
Class Action with third party Reimburse funder for legal costs No cost to consumer. litigation funding and pay percentage of recovery to funder. Funder (and possibly lawyer) bears costs
Richards and Sherwood class Funding group members pay Applicant liable for adverse costs actions legal costs order
Funding group members pay legal costs
133 Michael Legg, 'Reconciling Litigation Funding and the Opt Out Group Definition in Federal Court of Australia Class Actions – The Need for a Legislative Common Fund Approach' (2011) 30 Civil Justice Quarterly 52, 56. 134 See eg Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75.
29 | P a g e Michael Legg FOS No cost to consumer unless legal No cost to consumer. representation obtained. Cost of legal representation payable (a) if obtained and (b) not on a no-win no-fee basis.
Bank Resolution Scheme No cost to consumer unless legal No cost to consumer. representation obtained that costs greater than $5000. Cost of legal representation payable (a) if obtained; (b) not on a no-win no-fee basis; and (c) greater than $5000.
The above anlysis demonstrates in broad terms that litigation is more expensive than ADR and that class actions have the highest transaction costs of any form of dispute resolution. However, class actions can achieve substantial efficiencies for those costs as discussed below.
Two observations apply to the issue of costs. First, to participate in a dispute resolution procedure, even where a low cost option such as relying on a regulatory proceeding or utilising FOS is employed, the consumer is likely to need access to funds to be able to pay for legal advice. The amount needed will vary depending on how extensive the lawyer’s role is. If a class action is pursued then the risk of an adverse costs order becomes a further cost that must be addressed. The availability of funds is an important issue for a consumer being able to seek redress.135 Second, the first category of cost, legal costs, is also income for the lawyer. This can affect the incentives the lawyer faces in relation to the form of dispute resolution that is recommended and therefore impact the matching of dispute with an appropriate process.
Delay / Time to Resolution
The time to resolve disputes arising from Storm Financial was time-sensitive for many people who had lost retirement incomes and had no prospect of employment or were at risk of losing their home with nowhere to live.136
The informality of ADR allows for it to proceed expeditiously. This is borne out by the experience with FOS generally and with the Bank Resolution Scheme in particular. In 2012- 2013 FOS reported that 55% of disputes were resolved within 60 days and 73% were resolved within 120 days.137 Table 4 sets out the time taken to resolve disputes through FOS from 2010- 2011 through to 2012-2013. The Bank Resolution Scheme, although not as quick as FOS, still managed to resolve 80% of claims within 12 months. However, some of those claims may have received further compensation as part of ASIC’s settlement of its UMIS proceedings with CBA.
135 ASIC, Compensation for Retail Investors: the Social Impact of Monetary Loss – Report 240 (May 2011) 9, 34. 136 Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services (November 2009) 19. 137 FOS, 2012-2013 Annual Review p.49.
30 | P a g e Michael Legg Table 3 FOS – Days Taken to Close Disputes138
Days Taken to Close 2010-2011 2011-2012 2012-2013 Disputes
0 to 30 10% 12% 15%
31 to 60 40% 40% 40%
61 to 90 10% 11% 11%
91 to 120 8% 8% 7%
121 to 180 12% 9% 8%
More than 180 21% 19% 19%
In contrast class actions and regulatory proceedings can take many years to resolve as shown by Table 5. Delay in litigation, like cost, is partially attributable to the fact that courts are required to ensure procedural fairness and open justice. The passing of time may be a side-effect of ensuring fairness because evidence must be gathered, argument put, both considered and judgment delivered.139 However, litigation can also be subject to a “long and drawn out procedural Stalingrad in which no quarter will be given” so that delay ensues.140
In class actions an empirical examination of the Federal Court for the period 4 March 1992 to 3 March 2009 (the Morabito study) found that the average duration of all finalised Part IVA proceedings is 698 days (approximately 23 months) whilst the median duration is 446 days (approximately 14 months). Close to 42% of all finalised Part IVA proceedings were resolved within 12 months, close to 70% were concluded within two years and approximately 80% were finalized with three years.141 The Morabito study calculated finalisation based on common issues being resolved by trial or a settlement being approved.142 It did not factor in the need for group members to take further action, such as proving their claims in a settlement or needing to go through further hearings to resolve individual or sub-group issues. As a result the Morabito
138 FOS, 2012-2013 Annual Review p.49. 139 See Halpin v Lumley General Insurance Ltd (2009) 78 NSWLR 265, 287 [93]. 140 Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428, [78]. 141 Vince Morabito, An Empirical Study of Australia’s Class Action Regimes – First Report (December 2009) 2, 20. 142 Vince Morabito, An Empirical Study of Australia’s Class Action Regimes – First Report (December 2009) 19.
31 | P a g e Michael Legg study understates the time it would take for a group member to receive compensation if there was a positive outcome.143
Class actions can be subject to delay as a result of causes additional to those experienced in litigation generally. Delay, like cost, is linked to the representative and aggregative character of the class action. Additional delay can arise from the need to resolve all of the group members’ claims which necessitates steps to identify the group members (‘close the class’), collect information and allocate settlement funds or the conduct of trials or some form of ADR to resolve individual or sub-group issues. Further, because of the greater claim value this can make a respondent more prepared to pursue interlocutory disputes and slower to accept a negotiated resolution or more prepared to take a matter to trial and beyond if necessary.
Table 4 Time to Resolution
Dispute Resolution Mechanism Time to Resolution
Bank Resolution Scheme 900 of 1120 claims resolved in 12 month.
Doyle proceedings brought by ASIC Commenced 22 December 2010 and settled on 29 May 2013 (29 months).
UMIS proceedings brought by ASIC Commenced 22 December 2010. Settled with CBA on 14 September 2012 (21 months). Trial against BoQ and MBL completed on 12 December 2012 (24 months). Judgment reserved.
Richards class action against MBL Commenced 23 December 2010 and settlement approved 13 December 2013 (36 months).
Sherwood class action against CBA Commenced 1 July 2010. Trial completed in July 2013. Judgment reserved (36 months).
Financial Ombudsman Service Outcomes are confidential.
The Richards and Sherwood class actions took 36 months to reach settlement and the end of the trial respectively. The Morabito study found that after 36 months approximately 80% of class actions were finalized. The Richards and Sherwood class actions took longer than average to be finalized, although it must be remembered that the settlement in the Richards class action was subject to a successful appeal by ASIC which required the settlement to be reworked and subject to a second settlement hearing. If that had not occurred the settlement would have been approved on 3 May 2013 or 7 months earlier meaning that it would have taken 29 months.144 Consequently the length of time taken for the Richards and Sherwood class actions does not
143 The approach in the Morabito study appears to have been necessitated by the data available, namely federal court filings, which may not contain information on the steps subsequent to the common issues trial or settlement approval hearing. 144 Richards v Macquarie Bank Ltd (No 4) [2013] FCA 438.
32 | P a g e Michael Legg appear to be representative of class actions in general. Nonetheless, the class actions in Storm Financial took longer than the other forms of dispute resolution, or if the Richards class action without the appeal is compared with the Doyle proceedings as long as that regulatory suit.
Efficiency
The representative and aggregative nature of class actions can produce efficiencies not available in other forms of collective redress procedures. The class action allows for the cost of bringing the action to be spread across many claimants giving rise to economies of scale. The cost of resolving the dispute is shared and thus cost per claimant is reduced.145 Consequently, the class action may be more efficient than if claimants were required to pursue redress individually.
The strength of the class action, when used in appropriate cases, is that the resolution of issues common to all claims means that those issues do not need to be re-resolved in each and every dispute, and may provide sufficient direction for all claims to be settled.146 The class action can resolve hundreds, if not thousands, of claims through a single litigation vehicle by way of either settlement or judgment.
However, the efficiencies that the class action offers can fail to be realised if the group is too disparate or lacks cohesion as the resolution of the representative party’s claim will have limited utility in resolving the claims made by the group members. In Green v Barzen Pty Ltd (formerly Dukes Financial Services Pty Ltd) [2008] FCA 920 the requirements for commencing a Part IVA class action were examined in the context of claims of negligence and misrepresentation by a financial adviser. Justice Finkelstein found:147
The fact that representations and issues of reliance raise questions that are not common does not mean that the misrepresentation case or the action based on negligence is not suited to a representative proceeding.
…Put another way, the commonality requirement does not involve looking at the quantity of the common issues alleged but at their quality. On the other hand, the quantity of common issues as well as their quality may be relevant in an application under s 33N that a proceeding be ordered to no longer continue as a representative proceeding.
The above reasoning demonstrates that non-common issues will not prevent the commencement of a class action as the legislative requirements will be satisfied. However, a lack of commonality can mean a class action will be discontinued at some point, such as after the common issues have been resolved, or require subsets of claims or individual claims to be
145 Michael Legg, ‘Shareholder Class Actions in Australia – the Perfect Storm?’ (2008) 31 (3) UNSW Law Journal 669, 698-699. 146 See eg Bright v Femcare Ltd (2002) 195 ALR 574, [77], [136]. 147 Green v Barzen Pty Ltd (formerly Dukes Financial Services Pty Ltd) [2008] FCA 920, [13], [15].
33 | P a g e Michael Legg resolved separately.148 This can cause cost and delay. The cohesiveness of the claims will be an important factor in the utility of the class action and the efficiencies that can be achieved.149
Another way of looking at the efficiency generated by class actions is to consider what would happen if those claims were pursued through an ADR scheme such as FOS. Cost and delay may follow due to the need to individually resolve so many claims. For example in 2010-2011 FOS received 30,283 disputes, rising to 36,099 disputes in 2011-2012 before falling to 32,307 disputes.150 If the Storm Financial clients had of all gone to FOS that would have given rise to an extra 3600 disputes to be resolved.151 Moreover if class actions more generally were to be pursued through FOS then the number of disputes would be even greater. For example, the Bank fees class action, said to be the largest class action commenced in Australia, involves an estimated 185,000 claimants.152 For FOS to be able to deal with disputes as quickly as it does then an increase in capacity would clearly be needed. Alternatively FOS would need to adopt procedures for multiple claimants to participate in ADR as a group.153 Indeed, in the US there may be class arbitrations that proceed along the lines of a class action but without a judge or jury.154
Co-ordination of Responses to Mass Harm
The coordination of regulatory actions and class actions has generally not been attempted. Equally ADR mechanisms have had a low level of co-ordination, although FOS reports to ASIC and the courts through case management have the power to refer matters to mediation once litigation has been commenced.
The problem with a lack of co-ordination is that there may be a duplication of efforts resulting in wasted resources. Indeed the class action is premised on trying to avoid a multiplicity of
148 Bright v Femcare Ltd (2002) 195 ALR 574, [128]-[129] and McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1. 149 Michael Legg, When Questions Pose More Questions: Class Actions in Australia, Centre for Law Markets and Regulation, UNSW, 18 March 2013. 150 FOS, 2012-2013 Annual Review p 47. 151 Australian Securities and Investments Commission v Storm Financial Ltd (Receivers and Managers Appointed) (In Liq) [2011] FCA 763, [31]. 152 Michael Legg and John Emmerig, Class Actions in Australia – 2013 in Review and 2014 in Preview, Centre for Law, Markets and Regulation, 11 January 2014 http://www.clmr.unsw.edu.au/article/compliance/class- actions-australia-2013-review-and-2014-preview
34 | P a g e Michael Legg proceedings. Further, the lack of co-ordination can create uncertainty for the consumers who are meant to be the beneficiaries of the multitude of dispute resolution mechanisms.
This section of the paper raises for discussion a number of suggested responses to the lack of co- ordination.
The first suggestion is for ASIC to act as a gatekeeper. In that role ASIC could be required to adopt a more or less active/intrusive role. At the least active end of the spectrum ASIC could simply provide information about dispute resolution mechanisms. Indeed, it currently refers to the availability of FOS and class actions in its information sheet about enforcement.155 ASIC’s Regulatory Guide 165 explains the dispute resolution mechanisms that a financial services provider must have.156 ASIC provides information to consumers on how to complain.157 However, by its nature this is generic information. It does not deal with a specific dispute. Many disputes may be one-off issues between a single consumer and a single financial services provider. ASIC also maintains webpages dedicated to “Key Matters”, including Storm Financial, where information about the steps ASIC is taking and the steps others are pursuing is provided.158 This information can only be provided to consumers after it is provided to ASIC. A suggested improvement would be for ASIC to maintain a register of all class action proceedings dealing with a provision of the legislation that ASIC is responsible for, such as the Corporations Act and ASIC Act. Further, those bringing the class action could be required to notify ASIC. The notification could be a two-step process. Notification takes place when a law firm or litigation funder determines that they are prepared to investigate the commencement of proceedings and again when proceedings are commenced or will not be pursued. Consumers will then have a register that they can consult as to whether class action proceedings are being considered or commenced. ASIC could also refer to any ADR mechanisms that may be available , such as FOS. Equally, it would provide ASIC with valuable information for it to consider as to whether it should commence proceedings to pursue compensation.
A more robust approach would be to give a preference to either class actions or regulatory proceedings.
ASIC’s role could be prioritised over that of private litigation. The standing given to consumers under the main causes of action could be legislatively removed and ASIC could be asked to pursue compensation on behalf of investors.159 Another approach would be for government to
155 ASIC, Information Sheet 151 - ASIC’s approach to enforcement (September 2013) 6. 156 ASIC, Licensing: Internal and external dispute resolution - Regulatory Guide 165 (June 2013). 157 See ASIC, Information Sheet 114 - What is external dispute resolution (EDR) and how can it help me? (13 December 2010) ASIC’s MoneySmart website: https://www.moneysmart.gov.au/tools-and-resources/how-to- complain
35 | P a g e Michael Legg direct ASIC to more actively pursue compensation where consumers had been harmed before, or in preference to, actions seeking civil penalties. ASIC could be given a first right to sue so that if it decided to take action then a class action could not be commenced, would be taken over by ASIC or required to be stayed. Outside of these circumstances, class actions would be permitted.160 However, such an approach may require additional resources to be devoted to ASIC or a reallocation of resources between its various tools of enforcement.
Alternatively, ASIC could be empowered to distribute civil penalties or other fines pursuant to legislation similar to the Fair Fund provision in section 308 of the Sarbanes-Oxley Act of 2002.161 The Fair Fund provision allows the SEC to direct that funds disgorged and civil penalties imposed be directed to the victims of the violation.162 Whether these sources of compensation are distributed to investors is at the SEC’s discretion. No attorneys' fees are withheld from the amount of relief given to stockholders. The ability of the SEC to compensate investors has given rise to the phrase “public class counsel” as a way to illustrate that the regulator is performing a role usually performed through US class action litigation.163
Alternatively, if class actions were preferred then ASIC could vacate the field in relation to compensation on the basis that litigation funding is available and consumers can employ private litigation to recoup losses. FOS would also continue. ASIC could either have no oversight role or would only have a role to play if it was concerned as to the conduct of litigation or a proposed settlement.
Another option would be to take the approach that Justice Reeves took in the Storm Financial UMIS proceedings and class actions and case manage the proceedings together. While case managing a regulatory proceeding and class actions together may be novel, the need to manage multiple mass redress mechanisms is not, as multiple class actions have had to be addressed previously. In the Centro shareholder class actions it was necessary to deal with three class action proceedings. The docket judge canvassed a number of ways to move forward, including:164 allowing one proceeding to go to trial as a test case with the others being stayed; consolidation; or a joint trial.
Rule 10b-5 (2008) 108 Columbia Law Review 1301; Amanda Rose, ‘The Multienforcer Approach to Securities Fraud Deterrence: A Critical Analysis’ (2010) 158 University of Pennsylvania Law Review 2173. 160 This approach is similar to that adopted in qui tam or False Claims Act litigation in the United States: Vermont Agency of Natural Resources v United States ex rel Stevens, 529 US 765 (2000). 161 Securities Exchange Commission, Statement of the Securities Exchange Commission Concerning Financial Penalties, 4 January 2006. 162 Donna Nagy, Richard Painter and Margaret Sachs, Securities Litigation and Enforcement (Thomson, 3d ed, 2012) 737. 163 Verity Winship, ‘Fair Funds and the SEC’s Compensation of Injured Investors’ (2008) 60 Florida Law Review 1103. 164 Kirby v Centro Properties Ltd (2008) 253 ALR 65, 68.
36 | P a g e Michael Legg Reference was also made to the US and its use of litigation committees and auctions.165 The difficulty with relying on case management is that there can be no co-ordination until all cases are filed, all of the proceedings need to be before the same judge and there is still inefficiency in that multiple lawyers and multiple procedures need to be employed.
The above discussion says little about the role of ADR. One approach would be to build on the existing power of Courts to refer matters to ADR without the parties consent166 or on the pre- litigation requirements in the Civil Dispute Resolution Act 2011 (Cth).167 Both class actions and regulatory proceedings seeking compensation are subject to the aforementioned requirements.168 The Federal Court could at present expect a genuine steps statement to specify, in the context where FOS, or even a bespoke resolution scheme, was available, that resort had been made to those mechanisms or why those procedures were not pursued.
The power to refer proceedings to ADR is broad. Section 53A(1)(c) Federal Court of Australia Act 1976 states: (1) The Court may, by order, refer proceedings in the Court, or any part of them or any matter arising out of them: (a) to an arbitrator for arbitration; or (b) to a mediator for mediation; or (c) to a suitable person for resolution by an alternative dispute resolution process; in accordance with the Rules of Court. The reference to an ADR process was added by the Access to Justice (Civil Litigation Reforms) Amendment Act 2009 (Cth) so as to allow for referral to processes such as conciliation, neutral evaluation and case appraisal.169 The experience with Storm Financial raises for consideration whether an EDR scheme or ad hoc resolution scheme could meet the definition of ‘suitable person’.
Suitable person is defined in the Federal Court Rules 2011 (Cth) r 28.02(2) as a person appointed as a suitable person. Person is not defined in the Dictionary to the Federal Court Rules. The Acts Interpretation Act 1901 (Cth) broadens the meaning of person to “a body politic or corporate as well as an individual”.170 This would appear to allow for referral to FOS as it is a corporation. But an unincorporated dispute resolution scheme would not seem to meet the definition of person.
165 Kirby v Centro Properties Ltd (2008) 253 ALR 65, 73-74. 166 Federal Court of Australia Act 1976 (Cth) s 53A. 167 For a discussion of the operation of the Act see Jeremy Gormly SC, ‘A Change in Dispute Culture: the Civil Dispute Resolution Act 2011’ in Michael Legg (ed), The Future of Dispute Resolution (LexisNexis 2013) Ch 11. 168 The Civil Dispute Resolution Act 2011 (Cth) ss 15-17 deals with ‘excluded proceedings’ which includes criminal proceeding and civil penalty proceedings. 169 Explanatory Memorandum, Access to Justice (Civil Litigation Reforms) Amendment Bill 2009 (Cth) 13. 170 Acts Interpretation Act 1901 (Cth) s 2C.
37 | P a g e Michael Legg A further question arises as to whether the referral could be made without the consent of the parties. Section 53A(1A) provides that “Referrals under subsection (1) (other than to an arbitrator) may be made with or without the consent of the parties to the proceedings”. On its face s 53(1A) would allow referral without the consent of the parties to an ADR process other than arbitration. However, while both FOS and the Bank resolution schemes did not bind the consumer unless they agreed, both could bind the financial services provider or bank, respectively. Equally, the financial services provider and bank had voluntarily entered into those schemes and agreed to be bound. It is likely that s 53(1A) did not anticipate that there could be ADR procedures other than arbitration which could be binding and the provision may require amendment.171 The above analysis shows that both FOS and the bank resolution scheme clearly have advantages in relation to cost and delay over regulatory proceedings and class actions and could be effective processes that the courts could direct parties to. In relation to class actions this may require the court to ascertain if there are group members with small claims that might more readily and cheaply obtain compensation through FOS.
The advantages that FOS provides in terms of speed and cost also raises for consideration whether its jurisdiction should be expanded and the quantum of compensation that it can award lifted. However, further information about the outcomes that FOS achieves is needed. In particular, are claimants fully compensated or through other measures such as refunds or waiver of charges put back into their original position.
Conclusion
The analysis of the Storm Financial collapse and the resulting methods of dispute resolution which were employed provide a valuable insight into the relative merits of ADR, regulatory litigation and class actions. All of these approaches have compensation of consumers as a goal and their effectiveness in achieving that goal should be monitored. This paper has started that analysis by looking at outcome/effectiveness, cost, time to resolution and efficiency. This paper also suggests that the various mechanisms for compensation should be co-ordinated in some manner so as to reduce uncertainty for consumers as to which mechanisms will be available in relation to a particular dispute and to make the resolution process more efficient. Efficiency may mean giving preference to more effective mechanisms over others or at least employing mechanisms that are quicker and cheaper before those that are expensive and time-consuming.
However, this analysis is based on incomplete information as judgment is reserved in one regulatory suit and one class action. More significantly, this analysis while having the ability to compare similar disputes across a range of dispute resolution mechanisms may not reflect how other disputes have been resolved or the outcomes achieved in those disputes. There is a question as to what extent the specific findings here can be extrapolated more generally. General information about the performance of ASIC and FOS exists and is regularly updated. The Morabito study of class actions provides useful information as to how they are employed. However, further analysis comparing the range of dispute resolution mechanisms is needed, particularly in relation to outcome/effectiveness. Outcome/effectiveness is the most difficult
171 Other ADR procedures that may be binding include expert determination and private judging.
38 | P a g e Michael Legg aspect to measure because it requires accurate knowledge of the actual losses suffered, not simply alleged, for comparison with the outcome achieved. Cost and delay are usually measurable. However, quick and cheap may be less desirable if the compensation achieved compared to the actual loss is low, or even lower than other mechanisms. However, without knowledge of the relative merits of actual dispute resolution mechanisms, as opposed to comparisons of some form of generic ADR with some standardised version of litigation, institutional designers, consumers and their advisers are unable to make informed choices.
39 | P a g e Michael Legg