Changes proposed for class action rules to stop greedy lawyers cashing in

New rules are being introduced in an attempt to stop ordinary people being ripped off in an administrative ‘feeding frenzy’.

Class action rules will be changed to stop greedy litigation funders taking the lion’s share of compensation wins.

Courts will have greater oversight of how class action wins are split between financiers and class action members, under draft legislation released on Thursday.

Under the changes, courts will be empowered to approve or change the share members of class action schemes are entitled to, to make sure the split is fair and reasonable.

Members will be entitled to receive at least 70 per cent of gross proceeds.

Attorney-General Michaelia Cash said the draft legislation would deal with the “feeding frenzy” taking place in class actions.

Independent experts, funded by financiers, will support the courts to make their decision.

Plaintiffs must also agree to become members to a scheme before funders can charge them fees or commission.

The move aims to ensure that actions involving litigation funders are started with the genuine support of plaintiffs.

The Treasurer says lawyers will only receive what’s ‘fair’. Photo: NCA NewsWire / Martin Ollman

Treasurer Josh Frydenberg said litigation funders and lawyers were “too often” getting the lion’s share of money awarded to compensate class members for their loss.

The proposed reforms would ensure litigation funders and lawyers only receive what is fair and reasonable, and no more than 30 per cent of any compensation.

“These reforms will maintain access to justice for victims while ensuring litigation funders and lawyers are not excessively remunerated at the expense of class members,” Mr Frydenberg said.

The changes build on reforms the Morrison government made last year, requiring litigation funders to hold an Australian Financial Services Licence, be regulated as a Managed Investment Scheme and subject to the same oversight as other financial service providers.

A report into class actions by law firm King & Wood Mallesons found the 2020-21 financial year was a record in terms of the number of new class actions filed, particularly in Victoria.

The federal reforms are in line with key recommendations by a parliamentary joint committee report into litigation funding and regulation of the class action industry.

Senator Cash branded class actions a ‘feeding frenzy’. Photo: NCA NewsWire / Martin Ollman

Attorney-General Michaelia Cash said data provided to the committee revealed 41.4 per cent of gross settlements of funded class actions went to lawyers and litigation funders between 2001 and 2020 — a figure that was “simply too high”.

“This legislation effectively deals with the feeding frenzy that has been taking place in class actions,” Senator Cash said.

“The reforms strike an effective balance between ensuring class members receive a fair and proportionate share of the proceeds of a class action, and ensuring the viability of litigation funding arrangements that can provide ordinary Australians with access to justice.”

Similarly, the Australian Law Reform Commission found the median return to plaintiffs was 51 per cent when litigation funders were involved in a class action, and 85 per cent when a funder was not involved, she added.

“This data runs contrary to the litigation funders’ arguments that the current arrangements are ultimately meant to benefit ordinary Australians,” she said.

The proposed reforms will be released for consultation.