Hello and welcome to the BRR Legal Brief, bringing you the latest legal issues affecting corporate Australia.  I’m Kate Ritchie.  With class actions on the rise in Australia, the regulation of litigation funds is an area which often causes debate amongst the many stakeholders involved, and with new regulations excluding litigation funds from the rules which apply to managed investment schemes, some stakeholders including many in the business community, feel that the regulations don’t go far enough.  Joining me to discuss the new regulations and whether they are sufficient is Steven Glass, who’s a Partner at Gilbert + Tobin, Steven welcome.

Thank you very much for having me.

And Clive Bowman, who’s an Executive Director and also the Director of Operations at IMF Australia, a litigation fund, Clive welcome

Thanks Kate.

Well Steven I’d like to dive right in and start with you, the Government has come out in support of access to justice, given the number of stakeholders involved, do you think they’ve struck the right balance here?

Well I should start by saying I’m a very firm believer in improved access to justice, and I’ve spent quite a lot of my career trying to deal exactly with that issue, but in this case I don’t think they’ve struck the right balance.  One thing that has become clear is that litigation funding and the lack of regulation of litigation funding has led to a massive proliferation of legal actions, some of them very expensive and some of them very long running and using enormous amounts of resources, not just of the legal system but of the business community as well.  And the question has to be asked whether better justice is being delivered from that, and I think that the jury is very much still out on that, and I think the best way of exploring that is from two perspectives, first of all from the perspective of the plaintiffs in these actions, and secondly from the perspective of generally improved compliance with legal regulation.  So just very briefly if I can go into each of those.  Looking at it from the perspective of the plaintiffs they have an interest in seeking justice, but justice for them is not necessarily the same as what the litigation funders themselves are looking for, Clive’s organisation for example is a publicly listed company and it has an obligation to deliver profits to its shareholders, which is a very commendable obligation, but that’s what it’s – that’s the reason why it’s investing in these – in these actions.  But plaintiffs invest in these actions for a completely different reason, well partly for the same reason they want to get monetary compensation for the loss that they’ve suffered but a lot of time plaintiffs have a broader agenda, they want to have an opportunity to be heard, they want to have their pain, or the harm they’ve suffered acknowledged by the wrong doer, and they want to feel like they’ve got a stake in the outcome.  And one of the difficulties with funded actions is it takes a lot of those opportunities away from plaintiffs, not only that if the action is a slightly difficult one, the litigation funders won’t fund it because they’re unlikely to make any money out of it.  So that’s from that perspective, and from the perspective of the more broader community are we getting better compliance with legal regulations, there’s a very big question mark there as well because the regulators, who are funded by the Government and who find themselves sometimes short of funding, particularly in the current sort of budgetary environment, the regulators have got a whole host of tools available to them to get better compliance with the regulations, they can name and shame people, they can enter into private discussions with people, they can obtain enforceable undertakings from people, all of which can have you know a range of better regulatory outcomes for example, improved education, improved compliance systems, improved training, but funded litigation has one tool only and its litigation and that’s a very blunt tool and does not necessarily have the capacity to result in the kinds of outcomes that an action brought by a regulator can result in.

Well Steven we’ve just seen new regulation in this area, we’ve mentioned that it doesn’t necessarily give true access to justice, but what does the regulation actually cover?

All right I’ll try and be short because I know Clive wants to say something, but very briefly this issue raised its head a couple of years ago in the Multiplex litigation, where the court found that a class, sorry a class action, where you have a funder and a bunch of plaintiffs all coming together and pooling their resources for the purpose of getting a financial outcome was in fact a managed investment scheme for the purposes of the Corporations legislation, and that involved a whole raft of regulatory impositions including that the funder had to have a financial services licence and there needed to be all sorts of disclosure obligations and the funder had to have all sorts of other – comply with all sorts of other requirements.  It was a heavy regulatory burden on funders, and so ASIC immediately exempted funders from complying with it on a temporary basis and then a few weeks ago this more permanent regulation was introduced which continued the exemption so that litigation funders are exempted from the requirement to register as a managed investment scheme, but imposed in its place a fairly simply obligation, which is the obligation to have a system for managing conflicts of interest, and that’s the full extent of the regulatory burden on litigation funders.

And Clive I’d like to bring you in at this point to talk about the managing of conflicts, as Steven mentioned before it can be quite difficult to manage conflict that may arise between the fund and the plaintiffs, how does IMF currently manage this potential conflict?

First of all let me say that we’re obliged to manage conflicts, because we have an AFSL, and we do it in two main ways.  Firstly we’re very transparent about what we do, and we’ve always been transparent.  We’re listed on the Stock Exchange, we’ve got an obligation to continuously disclose material information, we tell defendants and the court when we are funding a case, we undertake to the court and to the defendant to meet any adverse costs, we are open and frank with the claimants who we fund and with the lawyers who we fund, and I think that transparency goes a long way to precipitating any conflicts of interest and ensuring that you have a working relationship that deals with issues that arise.  And secondly we deal with it through the funding agreement, we have contractual terms that provide that if the lawyers perceive that there’s a conflict of interest that they act on the instructions of the claimant and that they prefer the claimant’s interests over IMF’s.  And secondly in relation to settlement, if there’s a dispute over settlement, if we wanted to settle and the other party doesn’t or vice versa the claimant wants it to settle and we don’t, then there’s a resolution mechanism where we go and talk to Senior Counsel and Senior Counsel’s opinion prevails.  But can I also say the court has a role in relation to conflicts of interest that might arise in so far as a settlement is concerned, because in class actions you can’t settle the case unless the court approves it, and it will only do so if it considers the settlement to be reasonable.  So insofar as IMF is concerned there are mechanisms in place there to deal with conflicts of interest.

Okay.  And Steven you mentioned before about the fact that litigation funds are not required to hold a financial services licence, this has been seen as problematic by the business community, why does it have such a negative impact on the business community?

Well a few reasons, one of the reasons is the issue that I referred to earlier, that there’s this proliferation of actions against companies for questionable better justice outcomes, and so that’s a burden on corporations who might be faced with these sorts of actions, but more specifically, and this doesn’t apply to IMF for exactly the reasons that Clive talked about because they do have a financial services licence, but there are a number of issues.  The first is that plaintiffs, if they lose litigation, have an obligation to pay the costs – the legal costs of the defendant, and there is no obligation on a litigation funder to ensure that there is sufficient funds available to meet a costs order should one have to be paid, so that’s the first problem, that a business defendant might win the case and then find its legal costs aren’t paid because the funder doesn’t have the capacity to do it, so one area for improvement in these regulations is to ensure that there’s some kind of capital adequacy requirement for the funders.  Another area is that there’s enormous amount of potential for there to be not only conflicts of interest between the funders and the plaintiffs who they are funding, but also the kinds of funding agreements that Clive has talked about are actually quite complex legal documents, and plaintiffs, particularly in class actions where there’s a wide range of plaintiffs and many of them are going to be relatively unsophisticated mum and dad style investors, don’t really have the capacity to understand those documents, and may not in all cases appreciate that what they’re giving up through those documents is a quite complex bag of legal rights, and they’re essentially subject to some protections that might be in the agreement or might not be an agreement if it’s not an RMF agreement, they’re essentially giving up that collection of legal rights in return for a hoped for financial return of some sort.  So they might not appreciate all of those details and so what is missing from the current arrangements that is of concern to businesses is to ensure that there is some kind of a process by which plaintiffs can have their rights as against the funder protected.

Yeah certainly.  Well Clive you’ve mentioned that you do have a licence, do you think that this should be compulsory for all litigation funds in Australia?

We do.  We do.  The Corporations Act imposes obligations on AFSL holders, and those obligations deal with capital adequacy, the need to provide a financial services guide and product disclosure statement to claimants at the outset to give a cooling off period, to have your accounts audited and those things will provide protection to the retail claimants with whom funders deal.  So I think – I think if you were to ask a funded claimant what’s the most important thing about the funder, what’s the most important thing they’re concerned about it will be is the funder going to be there at the end of the day, are they going to be able to meet the obligations to pay adverse costs if – if they arise, and so I think it’s important to have capital adequacy provisions in your regulation with respect to litigation funders.

Well certainly we might of touched on some of the points that you might raise here, but it’s been described as a light approach to regulation, would you both agree with that statement?  Steven I’ll get your comments first.

I’d say it’s almost no touch regulation rather than light touch regulation, it’s really very minimal, what’s required to comply with this regulation.

And Clive?

I think it’s light touch.  If you think about the things that funders do, they –they agree to pay costs and what happens if they don’t, they potentially handle other people’s money.  We’ve collected over a billion dollars in settlements moneys and judgement moneys, so those two things I think mean that’s it’s very important that the litigation funders need to hold an AFSL.

And Clive given the current regulatory regime that applies, do you thinkAustralia is at risk of foreign entrants into the market and are there any perhaps negative flow on effects from this?

I think of course we are at risk, sophisticated claimants may not deal with an offshore funder who doesn’t have assets within Australia but retail claimants may be none the wiser, and the risk of course is that the off shore funder gets a bad result and leaves the market and leaves the claimant high and dry.

Okay well if we were to have further regulation in Australia what would be some of the proposals that you would put forward?

I’d like to see litigation funders needing an AFSL and I also think the recent initiative in the Western Australian Supreme Court where people providing financial assistance and that’s not just funders but insurers as well need to identify themselves and owe duties to the court not to mislead, to cooperate and to comply with the fundamental objectives of the court.

And Steven would you add anything there?

I would add this, I think that probably requiring litigation funders to go to the lengths of having a financial services licence might undermine the access to justice obligation and as you indicated in your very first question it is a balance, so I think that might be going a bit far, but certainly I agree that there should be measures in place to ensure that litigation funders are known, that they don’t mislead plaintiffs who they’re encouraging to join into a class, that they provide some kind of a dispute resolution mechanism for dealing with issues that might arise between the funder and the plaintiffs, and perhaps some kind of a code of conduct for how funders should behave to address the kinds of things that Clive’s talking about.

And Steven just finally do you think we are likely to see further regulation in this area?

Well some has already been foreshadowed, it’s been suggested that perhaps this is just an interim arrangement, but I think that what we’ll be interested one day is when some plaintiffs who are corralled together in a class action funded by a funder, make a complaint against the funder themselves, and that they then form another class for the purpose of bringing an action against a funder, so that the litigation funding system may turn out to be sort of self-regulating in more ways than the funders ever sort of intended, so I think that’s something we can look out for.

The funder might need funding.

Indeed.

Well I guess it will be something that we’ll have to wait and see Steven and Clive thank you so much for joining me in the studio.

Thanks very much Kate.

Thanks Kate.

And viewers thank you for joining us as well, we hope you can join us next week for our Legal Brief.