LSJ July 2018
Legal updates LITIGATION
rangements governed by contract are subject to all of the usual legal requirements preventing misleading, deceptive or uncon- scionable conduct. As providers of financial services and finan- cial products they are also subject to the consumer provisions of the Australian Securities and Investments Commission Act 2001 (Cth), which contains protections against unfair contract terms, unconscionable conduct, and misleading and deceptive conduct (ss 12BF-12BM, 12CA-12C and 12D). As incorporated enti- ties, they are also regulated by the Corporations Act 2001 (Cth) (‘ CA ’). Those listed on the Australian Securities Exchange are required to comply with the Listing Rules and the CA . In 2009, a successful challenge to litigation funding arrange- ments was made in Brookfield Multiplex Funds Management Pty Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11 (‘ Multiplex ’ ). The Federal Court determined that where multiple parties had entered into litigation funding contracts with the funder, these litigation funding agreements (and the solicitor’s retainer), constituted managed investment schemes within the meaning of s 9 of the CA . Such managed investment schemes were required to be registered and managed by an entity holding an Australian Financial Services Licence (‘ AFSL ’). Subsequently in International Litigation Partners Pte Ltd v Chameleon Mining NL  HCA 45 the High Court determined that a litigation funding agreement is a credit facil- ity, rather than a financial product as defined in the CA , raising questions as to whether litigation funders were also then subject to the provisions of the National Credit Code and the National Consumer Credit Protection Act 2009 (Cth). In 2010, the Labour Government intervened confirming a com- mitment to ensuring access to justice and intention to protect funded class actions from too heavy a regulatory burden. The resulting Corporations Amendment Regulation 2012 (No 6) (Cth) (‘ 2012 Conflict Regs ’), exempted funders from AFSL and Na- tional Credit Code requirements subject to compliance with new conflict management requirements. These require litigation funders to conduct reviews and maintain written procedures identifying and managing conflicts of interest. In April 2013, ASIC released a regulatory guide (‘ RG 248 ’) detailing how litigation funders may satisfy the obligations to manage conflicts of interest. RG 248 requires funders to have robust arrangements in place to identify and assess divergent interests and conflicts, and to respond as needed. It is an offence to contravene these requirements. On 15 December 2017, Senator George Brandis, as he then was, announced an Australian Law Reform Commission (‘ ALRC ’) inquiry into certain aspects of class actions and litigation funding, including the prudential and character requirements for funders, capital adequacy and conflicts of interest. Similar issues are also being addressed by the Victorian Law Reform Commission (‘ VLRC ’).
Possible reforms Two possible options for the further regulation of litigation funders are a voluntary industry code of conduct and a new licensing regime. Voluntary industry code England and Wales have already taken the voluntary industry code path for the regulation of litigation funders. In November 2011 an Association of Litigation Funders (‘ ALF ’) was created as a self-regulatory body responsible for third party litigation funding in the UK. The ALF Code of Conduct (‘ UK Code ’) was published by the Civil Justice Council at that time. The UK Code provides protections and benefits to litigants who con- tract with ALF members by regulating the content of litigation funding agreements including: measures on case control, the settlement approval process, termination rights and complaints procedures. One important feature of the UK Code is the requirement that ALF members comply with capital adequacy requirements for access to a minimum of £5 million (increased from £2 mil- lion in 2011) for a minimum period of 36 months, including continuous disclosure obligations if the funder’s financial cir- cumstances change. This is an important protection in the UK following the House of Lords decision in Aiden Co v Interbulk  AC 965, which restricts the amount of costs of opposing parties that litigation funders are liable to pay to that provided by the funder - otherwise known as the ‘Arkin cap’ on costs. The UK Code is voluntary. The current members of the ALF comprise most of the prominent and better known UK funders. Critics of the UK Code, such as the US Chamber of Commerce, complain that the UK Code has not provided meaningful over- sight of the litigation funding industry because it provides guid- ance only, is not complete and because not all litigation funders are ALF members or subscribers to the UK Code. They also argue there is no meaningful enforcement power and complain about the transparency of complaints procedures: (US Chamber Institute for Legal Reform Report, Before the Flood: An Outline of Oversight Options for Third Party Litigation Funding in En- gland & Wales , April 2016). Proponents of a voluntary code in Australia argue this approach has potential to provide a flexible and cost effective form of industry quality control and is a proportionate form of further regulation in a marketplace that has not seen any significant funding failure adversely impacting consumers to date. Adher- ence to a voluntary code has the potential to become a condition of funding contracts, which might allow for private rights of action if breached. Co-regulation could also improve the effec- tiveness of any proposed code, whereby a statutory body such as ASIC or ACCC might endorse such a code and provide a framework to monitor ongoing compliance. Licensing Regime In 2013, the Australian Government Productivity Commission undertook an inquiry into litigation funding and the ensuing
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