Treasurer Josh Frydenberg announced in May the government would require litigation funders to hold Australian Financial Services Licences from August 22 and operate as Managed Investment Schemes.

Mr Frydenberg said the litigation funding sector lacked scrutiny and accountability.

“The number of class actions has tripled over recent years and it is now even more important that litigation funding activities are regulated in a manner that is consistent with other financial services and products that seek to provide a return to consumers,” he said.

The Treasurer has been criticised for implementing the change before a parliamentary inquiry into litigation funding hands down its final report later this year.

Litigation funders say while the requirement to hold AFSLs is not too onerous, the Managed Investment Scheme regime is not fit for purpose and would lead to litigation funders exiting the market.

Labor’s move to disallow the regulations, which was endorsed by the federal caucus on Tuesday, follows the corporate regulator announcing it would take a “no action” position on breaches of the rules.

“ASIC has formed the view that strict compliance with the member register requirements is not reasonably practical for responsible entities of registered litigation funding schemes that have one or more passive members,” the Australian Securities and Investments Commission said.

“This no-action position means that ASIC will not take regulatory action in relation to a breach[es] … by responsible entities of registered litigation funding schemes that are open litigation funding schemes.”

Labor opposes the regulations, saying the move would limit access to justice.

“Labor will stand up for the rights of ordinary Australians seeking access to justice by moving to disallow the Morrison government’s attempt to cripple class actions by regulation,” shadow attorney-general Mark Dreyfus said.

“Litigation funding and class actions provide a vital path to justice for Australians trying to uphold their rights against wealthy defendants with vastly greater resources. Labor will seek the support of the cross bench to have the regulations overturned.”

Mr Frydenberg said Labor was giving litigation funders a free pass, saying the party”again have shown their true colours in prioritising vested interests over protecting Australian consumers”.

Ben Hardwick, head of class actions at Slater and Gordon and spokesman for the Keep Corporations Honest campaign – a lobby group for the class action litigation funding sector – said the government had tried to impose a significant change on the industry without seeking parliamentary approval.

“Attempting to achieve their desired outcome through the back door of unworkable regulation appears to be a deliberate attempt to circumvent the Senate,” Mr Hardwick said. “Our hope is that the Senate recognises this trick for what it is and now moves to disallow this sloppy regulation.”

Ben Phi, managing director of Phi Finney McDonald Lawyers, said he had had constructive discussions with Coalition MPs and Senators in recent weeks about the unintended consequences of the regulations.Liberal MP Jason Falinski, who sits on the committee inquiring into the litigation funding industry, accused Labor of buckling to its donors at the expense of class action members.

“They’ll need to explain why an industry making returns of over 700 per cent on funds should be exempted from the law, while some victims are getting less than 30 cents in the dollar in their court awarded compensation while Labor continues to received large donations from the sector.”