Crackdown on class action fee gouging

The Federal Court could be given greater powers to limit the profits of litigation funders in a Morrison government crackdown on class actions.

The government will also consider making the Federal Court the sole jurisdiction for class actions filed by investors against a company.

The Federal Court could be given greater powers to limit the profits of litigation funders as part of the Morrison government’s crackdown on the rising number of class actions.

The government will also consider making the Federal Court the sole jurisdiction for class actions filed by investors against a company, amid concern funders and lawyers go “forum shopping” to avoid consumer protections.

Last year, a Coalition-dominated parliamentary committee was tasked with testing whether the litigation funding industry should be subject to greater red tape in response to a spike in cases driven by largely unregulated funders. The committee concluded Australia’s class-action sector had become a “global hotspot” for international investors.

The government has responded to the committee’s report as well as a separate review by the Australian Law Reform Commission as it prepares to introduce legislation that will cap the fees of lawyers and the funder at 30 per cent of a settlement.

The government said last week’s Banksia Securities judgment – where the Victorian Supreme Court found the legal team for a class action engaged in “egregious” and “fraudulent” conduct to gouge high fees — was a “wake-up call” for litigation funders and legal professionals.

The committee made a number of recommendations in its report, including bolstering the Federal Court’s powers limiting funds paid to litigation funders in class actions. In its response, the government said it would introduce legislative changes through amendments to the Corporations Act that would “enhance the protective and supervisory role” of the Federal Court in a bid to protect the interests of class actions members regardless of what jurisdiction a matter is filed in.

Michaelia Cash. Picture: Gary Ramage

The bolstered powers would include allowing the Federal Court to assess the procedural proportionality in a class action, meaning that the length of ­proceedings and costs of a case should be proportionate to what is at stake.

The government will give consideration to making the Federal Court the only jurisdiction where securities class actions and class actions involving financial ser­vices can be filed after the government relaxed continuous dis­closure laws, meaning companies and directors can be sued only for breaching obligations regarding price-sensitive information if they acted with knowledge, recklessness or negligence in not updating the market.

The government has also introduced a licensing regime for funders, requiring them to adhere to rules for managed investment schemes and subjects – overseen by the corporate regulator.

Noting the managed investment scheme changes, the report said the government would consider further opportunities to “enhance the systematic regulation of litigation funders”. Last month, the government unveiled draft legislation to rein in commissions collected by litigation funders and the fees charged by the lawyers.

Under the changes, the profits of class-action funders and lawyers would be capped at 30 per cent of the settlement, to limit the “disproportionate” returns the government argues comes ahead of the interests of ordinary Australians involved in claims.

The reforms will also bolster the power of judges to approve changes in the share of proceeds to ensure a fair distribution and require plaintiffs to consent to being members of a class action litigation funding scheme before funders can impose fees or commissions on them.

Attorney-General Michaelia Cash said the reform would create a “fair and equitable outcome” for people in class actions, noting 41.4 per cent of gross settlements of funded class actions went to lawyers and litigation funders over the past 20 years.

“This is simply too high,” she 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.”

The Law Council of Australia said the changes could end up hurting class action members.

Funders have argued the fee changes will reduce the number of class actions, result in more competing cases and increase the power of large plaintiff law firms.

Josh Frydenberg said the changes would recalibrate the industry. “Without a statutory minimum guaranteed return of 70 per cent to class members, there is a real risk litigation funders and lawyers will continue to pocket the lion’s share of the money awarded to compensate class members for their loss,” the Treasurer said.

Business and industry groups welcomed the reforms to rein in profits they say come at the expense of businesses and class ­action members.