consideration of whether and to what extent class action proceedings and third party litigation funders should be subject to Commonwealth regulation, and in particular whether there is adequate regulation of the following matters:
- conflicts of interest between lawyer and litigation funder;
- conflicts of interest between litigation funder and plaintiffs;
- prudential requirements, including minimum levels of capital;
- distribution of proceeds of litigation including the desirability of statutory caps on the proportion of settlements or damages awards that may be retained by lawyers and litigation funders;
- character requirements and fitness to be a litigation funder;
- the relationship between a litigation funder and a legal practice;
- the costs charged by solicitors in funded litigation, including but not limited to class action proceedings; and
The ALRC's 2018 discussion paper was noted here.
- any other matters related to these Terms of Reference
The Commission's recommendations are
Case Management—Chapter 4
Recommendation 1—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended so that all representative proceedings are initiated as open class.
Recommendation 2—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to provide criteria for when it is appropriate to order class closure during the course of a representative proceeding and the circumstances in which a class may be reopened.
Recommendation 3—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide the Court with an express statutory power to make common fund orders on the application of the plaintiff or the Court’s own motion.
Recommendation 4—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to give the Court an express statutory power to resolve competing representative proceedings.
Recommendation 5—In order to implement Recommendation 4, Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to provide a further case management procedure for competing class actions.
Recommendation 6—The Supreme Courts of states and territories with representative action procedures, should consider becoming parties to the Protocol for Communication and Cooperation Between Supreme Court of New South Wales and Federal Court of Australia in Class Action Proceedings.
Recommendation 7—Part 9.6A of the Corporations Act 2001 (Cth) and s 12GJ of the Australian Securities and Investments Commission Act 2001 (Cth) should be amended to confer exclusive jurisdiction on the Federal Court of Australia with respect to civil matters, commenced as representative proceedings, arising under that legislation.
Settlement Approval—Chapter 5
Recommendation 8—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should include a clause that the Court may appoint a referee to assess the reasonableness of legal costs charged in a representative proceeding prior to settlement approval.
Recommendation 9—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should include a clause that the Court may tender settlement administration, and include processes that the Court may adopt when tendering settlement administration.
Recommendation 10—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to require settlement administrators to provide a report to the class on completion of the distribution of the settlement sum. The report should be published on a national representative proceedings data base to be maintained by the Court.
Regulation of Litigation Funders—Chapter 6
Recommendation 11—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to prohibit a solicitor acting for the representative plaintiff, whose action is funded in accordance with a Court approved third-party litigation funding agreement, from seeking to recover any unpaid legal fees from the representative plaintiff or group members.
Recommendation 12—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to include a statutory presumption that third-party litigation funders who fund representative proceedings will provide security for costs in any such proceedings in a form that is enforceable in Australia.
Recommendation 13—Section 37N and s 43 of the Federal Court of Australia Act 1976 (Cth) should be amended to expressly empower the Court to award costs against thirdparty litigation funders and insurers who fail to comply with the overarching purposes of the Act prescribed by s 37M.
Recommendation 14—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide that: - third-party litigation funding agreements with respect to representative proceedings are enforceable only with the approval of the Court; - the Court has an express statutory power to reject, vary, or amend the terms of such third-party litigation funding agreements; - third-party litigation funding agreements with respect to representative proceedings must provide expressly for a complete indemnity in favour of the representative plaintiff against an adverse costs order; and - Australian law governs any such third-party litigation funding agreement the funder submits irrevocably to the jurisdiction of the Court.
Recommendation 15—The Australian Securities Investments Commission Regulatory Guide 248 should be amended to require that third-party litigation funders that fund representative proceedings report annually to the regulator on their compliance with the requirement to implement adequate practices and procedures to manage conflicts of interest.
Recommendation 16—Regulation 5C.11.01 of the Corporations Regulations 2001 (Cth) should be amended to include ‘law firm financing’ and ‘portfolio funding’ within the definition of a ‘litigation funding scheme’.
Solicitors’ Fees and Conflicts of Interest—Chapter 7
Recommendation 17—Confined to solicitors acting for the representative plaintiff in representative proceedings, statutes regulating the legal profession should permit solicitors to enter into ‘percentage-based fee agreements’. The following limitations should apply: - an action that is funded through a percentage-based fee agreement cannot also be directly funded by a litigation funder or another funding entity which is also charging on a contingent basis; - a percentage-based fee cannot be recovered in addition to professional fees for legal services charges on a time-cost basis; and - solicitors who enter into a percentage-based fee agreement must advance the costs of disbursements, and account for such costs within the percentagebased fee.
Recommendation 18—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to include a statutory presumption that solicitors who fund representative proceedings on the basis of percentage-based fee agreements will provide security for costs in any such proceedings in a form that is enforceable in Australia.
Recommendation 19—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide that: - percentage-based fee agreements in representative proceedings are permitted only with leave of the Court; and - the Court has an express statutory power to reject, vary, or amend the terms of such percentage-based fee agreements.
Recommendation 20—The Law Council of Australia should oversee the development of specialist accreditation for solicitors in class action law and practice. Accreditation should require ongoing education in relation to identifying and managing actual or perceived conflicts of interests and duties in class action proceedings.
Recommendation 21—The Australian Solicitors’ Conduct Rules should be amended to prohibit solicitors and law firms from having financial and other interests in a thirdparty litigation funder that is funding the same matter in which the solicitor or law firm is acting.
Recommendation 22—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended so that the first notices provided to potential class members by legal representatives are required to clearly describe the obligation of legal representatives to avoid and manage conflicts of interest, and to outline the detail of any conflicts in that particular case.
Regulatory Redress—Chapter 8
Recommendation 23—The Australian Government should review the enforcement tools available to regulators of products and services used by consumers and small businesses (including financial and credit products and services), to provide for a consistent framework of regulatory redress.
Review of Substantive Law?—Chapter 9
Recommendation 24—The Australian Government should commission a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct contained in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth)The ALRC comments
In formulating the recommendations of this Report, the ALRC has been guided by three overarching principles:
- Principle One: It is essential to the rule of the law that citizens should be able to vindicate just claims through a process characterised by fairness and efficiency to all parties, that gives primacy to the interests of the litigants, without undue expense or delay.
- Principle Two: There should be appropriate protections in place for litigants who wish to avail themselves of the class action system and the variety of funding models that facilitate the vindication of just claims.
- Principle Three: The integrity of the civil justice system is essential to the operation of the rule of law.
The recommendations of this Report are aligned with one or more of these principles. That is, the recommendations aim to: promote fairness and efficiency; protect litigants; and assure the integrity of the civil justice system. The relationship between the key principles and the recommendations of this Report are considered in Chapter 1.
Clarifying the powers of the Federal Court
The ALRC makes recommendations to assist the Federal Court case manage class action proceedings effectively, efficiently and fairly. This includes recommendations relating to: the constitution of class actions; competing class actions; and settlement approval by the Court.
Constitution of class actions
In Chapter 4, the ALRC recommends amendments to the Federal Court of Australia Act 1976 (Cth) (the FCA Act) to provide that class actions must be initiated as open class— this improves access to justice by enabling all victims of a civil wrong to participate in the class action and not just those who take active steps to join it. This amendment to the FCA Act would be supported by amendments to the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) (Practice Note) to:
- set out the circumstances in which it may be necessary to close the class to facilitate early settlement, and
- the criteria for the limited circumstances in which a class action that has been closed may be reopened.
In order to support an open class regime, the ALRC recommends the FCA Act be amended to provide an express statutory power for the Court to order a common fund.
Competing class actions
In Chapter 4, the ALRC recommends amendments to the FCA Act to address the rising incidence of competing class actions. Those amendments seek to ensure that, wherever possible, there is a single class action in order to litigate a claim. Multiple class actions increase uncertainty, costs and delays, and therefore there is a sound public policy basis to permit only one class action with respect to a dispute to proceed, subject to the overriding discretion of the Court. Statutory amendments to reduce the risk of forum shopping are also recommended.
In Chapter 5, the ALRC makes recommendations to assist the Federal Court in its settlement approval decision-making—including in its determination of fairness and of reasonable costs.
The ALRC also examines the use of confidentiality orders in class action settlements, and how these orders affect group members and policy-makers reliant on an evidence-base. It is recommended in Chapter 5 that settlement administrators be required to provide a report to group members and the Federal Court outlining the distribution of settlement funds. The requirement to report would increase the accountability of administrators, support the principle of ‘open justice’, and enable the Federal Court to design and maintain a database that captures the outcomes of Part IVA proceedings that resolve in its jurisdiction.
Regulation of third-party litigation funders
In Chapter 6, the ALRC acknowledges the critical role that third-party litigation funders have in providing access to justice for group members, while also recognising the inherent risks associated with litigation funders. This includes the risk that third-party litigation funders may fail to meet their obligations under funding agreements, use the Federal Court of Australia for improper purposes, or exercise influence over the conduct of proceedings to the detriment of group members.
A suite of recommendations to improve the regulation of litigation funders and to support the unique role of the Federal Court in protecting the interests of all group members is recommended in lieu of a licensing regime for litigation funders. The recommendations: provide for greater Court oversight of the litigation funding agreement, require that the funder indemnifies the lead plaintiff against an adverse costs order, and create a presumption in favour of security for costs.
As shown by the data presented in Chapter 3, class action proceedings are often run with the support of third-party litigation funders. Litigation funders cover and then recoup legal costs and receive a commission from an award of damages. Most matters receive third-party funding, meaning that the types of matters that proceed are skewed towards ones with the highest financial returns and that group members usually pay two sets of fees: legal costs and third-party litigation funding commissions.
In Chapter 7, the ALRC recommends the limited introduction of percentage-based fees (commonly called ‘contingency fees’)—a method of billing for legal services through a percentage of the amount recovered by the litigation rather than through time-based or cost scale billing. The recommended percentage-based billing model aims to provide a greater return to group members, further enable medium-sized class action matters to proceed, and, as class actions are strictly supervised by the Court, provide protection for representative plaintiffs and group members against paying a single yet disproportionate or unreasonable fee.
Conflicts of interest
Actual or perceived conflicts of interest that arise in class action proceedings—with particular emphasis on the tripartite arrangement of funder, solicitor and representative plaintiff/group members—are dealt with in Chapters 6 and 7. The ALRC recommends strengthening existing ways to mitigate and protect against conflicts of interest in class action proceedings. Particularly, in Chapter 6, the ALRC recommends that the existing ASIC Regulatory Guide 248 be amended to require third-party litigation funders to report to ASIC to show compliance with the requirements to meet certain obligations to avoid or mitigate conflicts of interest.
In Chapter 7, the ALRC recommends the development of a voluntary accreditation program for solicitors who act in class action proceedings. It also recommends prohibiting arrangements whereby a solicitor may have an interest in the third-party funder with whom the solicitor is working, and recommends clear and concise communication with group members regarding conflicts of interest.
Areas for further inquiry
The ALRC identifies two areas for further inquiry. First, in Chapter 8, the ALRC suggests principles that may guide and support the design of regulatory collective redress powers—aimed at enhancing access to justice, through reduced costs and greater efficiencies. A review by Government of the statutory enforcement regimes for regulators is recommended so to facilitate effective, efficient and consistent statutory redress schemes.
Secondly, in Chapter 9, the ALRC recognises that the class action regime may benefit from a broader review of the substantive law which supports shareholder class actions, and recommends such a review.