Local class-action litigation now second only to the US

Opaque regulatory requirements and lucrative returns have resulted in an ‘explosion’ in class-­action litigation, a report has found, leaving only the US leading Australia in terms of the practice’s popularity.

In the past five years, Australia’s litigation funding industry has grown faster than almost any other comparable sector, a Menzies Research Centre report has found.

Opaque regulatory requirements and lucrative returns have resulted in an “explosion” in class-­action litigation, a report has found, leaving only the US leading Australia in terms of the practice’s popularity.

Released by the Liberal-aligned Menzies Research Centre on Tuesday, the report argues for a reinstatement of strict regula­tory requirements designed to rein in third-party funded class actions, killed off by the Albanese government since taking office in 2022. “There is a clear structural incentive for litigation funders to invest in Australian class actions,” the think tank report says, citing favourable conditions and low oversight that has left the industry “cashed up and thriving”.

“These incentives for litigation funders could overshadow the legitimate rights of class members to access justice.”

In the past five years, Australia’s litigation funding industry has grown faster than almost any other comparable sector, the report found, to be now worth in excess of $200m.

Companies listed on the ASX200 have a 10 per cent chance of facing a class action lawsuit, it also warns, with more than $1bn in class action settlements approved last financial year.

The report cites the entry of Britain-headquartered law firm Pogust Goodhead into the Australian market in February, which has stated its intention to target local multinational firms, raising concerns among business leaders.

In the previous parliament, Coalition treasurer Josh Frydenberg sought to curb the returns that litigation funders and law firms received via class actions, and proposed a 30 per cent cap on payouts from awards and settlements.

The reform lapsed when parliament was dissolved.

In a repeat of that proposed clampdown, the MRC recommends litigation funders fees be capped at 30 per cent to provide certainty to plaintiffs and defendants while restricting the ability of litigation-funders to recoup outsized returns. Independent contradictors should also be appoint­ed prior to settlement to act in the best interests of claimants.

To heighten transparency requirements, the report also calls for third party litigation funders to be brought within the scope of Australian Financial Services Licence regime, a longstanding caveat removed by the Coalition in 2021 and since unwound by Labor.

The report also calls for the harmonisation of class-action mechanisms across jurisdictions to reduce forum shopping behaviour whereby litigants launch lawsuits in states with more lucrative settings, particularly in Victoria.

“The third-party litigation funding industry is thriving in Australia, and its profits are derived out of the pockets of victims … awarded damages,” MRC executive director David Hughes said. “Australia is becoming a more attractive environment for litigation by the day and it’s not just businesses paying the price.”