“Subtle difference between a hero and an opportunist is not where you stand, but its timing. Standing up against injustice when it suits is convenience, not heroism.”
— Faisal Khosa
Quick, before it’s too late
In a previous article, we discussed the domestication of litigation funders and the delicious irony that litigation funders would soon be required to become an Australian Financial Services Licensee.
As improbable as that sounded, the idea of housing the foxes in the henhouse has become a reality with the introduction of the Corporations Amendment (Litigation Funding) Regulations 2020 in July 2020.
In essence, the regulations remove the exemptions currently enjoyed by litigation funders and classifies their funded class-actions as Managed Investment Schemes (MIS). Litigation has, historically, made many lawyers rich so it’s only reasonable to treat funded litigation projects as pooled investment vehicles and financial products.
Unless exempt, one cannot provide financial services or offer financial products without either being licensed or authorised.
Litigation Funds will therefore soon face the same regulatory scrutiny and accountability as other financial service and product providers under the Corporations Act.
The twilight of the litigation gods looms. As licensees, litigation funders will be required to:
- do all things necessary to ensure that their services are provided efficiently, honestly, and fairly;
- have available adequate resources (including financial, technological, and human resources) to provide their services covered by their licence and carry out supervisory arrangements;
- maintain an appropriate level of competence to provide the financial services covered by the licence; and
- have in place adequate risk management systems.
- Where litigation funders provide their services to retail clients, they will also need to comply with additional requirements, including:
- having internal and external dispute resolution systems;
- providing a Financial Services Guide to each retail client; and
- ensuring minimum training standards are met by the licensee’s representatives.
In addition to holding an AFSL, they will need to register as a Managed Investments Scheme under Chapter 5C of the Act and will need to be operated by a Responsible Entity.
In addition, funders will also be caught by anti-hawking provisions and will need to provide a Product Disclosure Statement to its general members.
It’s a delicious irony. The parable of the frog and scorpion suggests that our true natures cannot be overcome, so we look forward to the first of many class actions initiated by a litigation funder against another licensed litigation funder.
At the same time the Government launched the Amending Regulations, ASIC issued ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 to support the transition.
Briefly, the instrument provides relief from:
- the obligation to give a Product Disclosure Statement (PDS) to ‘passive’ members of open litigation funding schemes – on the condition the PDS is available on the scheme operator’s website and referred to in advertising material;
- the obligation to regularly value scheme property;
- the statutory withdrawal procedures for members who withdraw from a class action under court rules;
- the requirement to disclose detailed fees and costs information and information about labour standards or environmental, social, or ethical considerations. (The reasons for the removal of ‘ethical considerations’ is probably obvious).
ASIC has signalled in their 2020-2024 Corporate Plan, their willingness to assist the Australian Government in working through the practical implications of regulating litigation funders. The industry has reacted to this development with stunned silence; perhaps while it considers the possibilities of APL additions, acquisition or how to profitably incorporate litigation-funding in an unconflicted vertically integrated business.
Meanwhile back at the ranch, we are still waiting for the Parliamentary Joint Committee on Corporations and Financial Services to release their final report by 7 December 2020.
It will be interesting to see what comes out of the report and what is left to be implemented.
READ 2020-2024 Corporate Plan
Act now, there may be no later
The Corporations Amendment (Litigation Funding) Regulations 2020 will come into effect three months from 22 August 2020. However, existing contractual arrangement and litigation proceedings entered into before 22 August 2020, are not caught by the new regulations.
This provides a window of opportunity.
Unsurprisingly, with regulation threatening the class action front is running hot, with approximately 25 class actions on foot. The latest action was filed by Piper Alderman in the Federal Court of Australia.
Piper Alderman has cast its net very wide, and invited all customers who have acquired or held financial products and/or life insurance on the advice of an adviser from AMP Financial Planning, Hillross, Count Financial Planning, Count Financial, Commonwealth Financial Planning, Financial Wisdom, Securitor and Magnitude, to register.
They would, we suspect, be quite willing to extend their action to include any other well capitalised or adequately insured licensee, so contact them directly if you’ve been excluded but would like to participate.
Piper Alderman (supported by Woodsford Litigation Funding) suggest that over a million clients may have been affected.
The latest class action alleges that Count Financial contravened its obligations under the Corporations Act 2001 (Cth) to:
- ensure that their financial advisers do not contravene their legal obligations to their customers;
- ensure that adviser remuneration was free from conflict;
- act in their customer’s best interest when giving personal financial advice; and
- to provide services where fees were charged.
We understand that when CBA sold Count to Count Financial, Countplus CEO Matthew Rowe secured a $200 million indemnity provision that will, in effect, leave CBA with the obligation to respond to the action.
Over the longer term, it will be interesting to see the effect of these licensing requirements.
Only time will tell whether it leads to better advice outcomes, more fragmentation or simply more internecine litigation.
One would hope that, with institutional licensees abandoning advice, the loss of deep pockets will result in declining numbers corporate funded actions.
Of course, there is a precedent that suggests that licensing instead of leading to better consumer outcomes is more likely to result in broader distribution supported by industrialised processes.
Watch this space.