Maintaining the current levels of competition in the market is key to ensuring the ongoing improvement in returns

As we approach the 30-year anniversary of the Australian federal class action regime, class actions are once again under the political spotlight. This time, the focus is on the litigation funders that make most class actions possible.

While much of the focus is on how much money litigation funders make, any concerns about excessive commercial returns or a proliferation of claims seem increasingly out of date.

Historical picture

Since the introduction of the federal class action regime in 1992, there have been just over 634 class actions filed. On average this equates to about 23 class actions per year. As reported by the Australian Law Reform Commission (ALRC), class actions constitute between 0.33 percent and 0.68 percent of all cases filed in the federal court each year.

Of the 634 class actions filed, there have been a total of 122 shareholder class actions. The successful shareholder class actions have returned almost over $900 million to over 94,000 shareholders. It is also estimated that product liability class actions have returned over $400 million to nearly 12,000 customers.

There are the important policy benefits of shareholder class actions that, through their various iterations, have operated to correct the information asymmetry between listed companies and the market. The potential of class action litigation has no doubt worked effectively in the background to create a greater impetus for company directors to carefully consider what information is material and when it ought to be released to the market.

Litigation funders have played a key role in delivering these policy outcomes as well as compensation to shareholders and other class members.

Working together with plaintiff law firms, litigation funders have delivered access to justice in circumstances where the financial risk of litigation would not have been borne by anyone else.

Current state of the market

The market has seen an increase in players over the years. There used to only be a single litigation funder in the Australian market, whereas now there are 33. Meanwhile, plaintiff law firms that conduct the majority of the class actions for plaintiffs have increased from two to almost 30, including a number of large commercial firms.

The growth in the number of players in the class action and litigation funding market in Australia has unsurprisingly had the welcome effect of generating real competition between litigation funders and thereby driving drive down the cost of litigation to group members.

This is a result of both greater competition and increased judicial intervention in funding agreements in the context of common fund applications, which allows judges to scrutinise the funder’s rate of return and risk taken in the proceeding before approving a funder’s commission in a class action settlement. The days when the small handful of funders took a 40 percent commission on gross recoveries are well and truly behind us. Commissions recently approved by the court have been no greater than 25 percent of net recoveries.

There is evidence of increasing innovation, such as in the Westpac shareholder class action launched by Phi Finney McDonald in 2019. In that case, group members are guaranteed to receive more than 90 percent of gross litigation proceeds. Terms like this were simply not available to group members even three years ago.

A case for reform?

In the last five years, a number of inquiries and reports into the class action regime commissioned by the federal and state governments have provided overwhelmingly positive conclusions about the effectiveness of the class action regime, including litigation funding.

In 2014, the Productivity Commission conducted an inquiry into access to justice arrangements in which in concluded that litigation funders performed an important role of funding claims by plaintiffs who would otherwise lack resources to proceed’ but also recommended that litigation funders be licensed to ensure they met capital adequacy requirements.

Since that report, a number of organic developments in the class action market have addressed some of the key risks associated with capital adequacy of funders, most notably including the increased uptake of after the event insurance by funders which provide defendants with a direct right to call on funds to cover the specific adverse costs liability in the case in the event of their success.

In 2018, the Australian Law Reform Commission (ALRC) conducted a full-scale review into the class action regime since 1992. Many of the recommendations contained in its final report delivered to the federal government in December 2019 went to formalising practical mechanisms already in use by parties and the courts to deal with specific aspects of class action procedure such as dealing with multiplicity, embedding the presumption that funders provide security for costs and giving the court increased powers to reject, vary or set terms of litigation funding agreements.

The ALRC closely considered and ultimately rejected the need for a mandated financial services licensing regime of litigation funders on the basis that the court would be better equipped to provide consumer protections and enforce capital adequacy requirements. This makes sense given the court’s ability to intervene on the specific terms of litigation funding agreements, rather than having a funder meet a set of generic requirements under a boilerplate licencing regime.

Australian financial services licences: square peg, round hole

Rather than delivering its response to the ALRC’s important recommendations, in May 2020, the federal government urgently tasked the Parliamentary Joint Committee on Corporations and Financial Services to conduct yet another Inquiry into litigation funding and the regulation of the class action industry. The inquiry is convened on what the current data suggests is an out-dated premise that the price of litigation funding is too high. Their report is due by 7 December 2020 but certain outcomes have already been determined, regardless of the committee’s findings.

On 22 August, the federal government brought into force regulations requiring litigation funders to hold an Australian Financial Services Licence (AFSL) as well as placing class actions into the managed investment scheme (MIS) framework.

While the need for greater regulation of litigation funding is well accepted from both sides of the debate, there is an abundance of doubt as to whether these regulations will deliver any net benefit to class members.

First, the AFSL regime is far from perfect. Under this regime, a significant number of financial advice scandals, such as Storm Financial and Opes Prime went undetected in the Australian regulatory regime and hundreds of millions of dollars were lost by retail investors. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in 2019 also found that banks and lenders had engaged in egregious misconduct despite operating under the AFSL regime.

Secondly, the AFSL and MIS regimes are ill-suited to litigation funding. Under the current proposal, a litigation funded class action will be treated as an MIS. Putting aside the associated and onerous documentation required to operate an MIS – it is unclear what the ‘scheme property’ would be and how it would operate in tandem with open class actions. It is unclear which entity would appropriately act as the responsible entity. Would it open up another layer of management fees payable by class members, as is often the case in these investment schemes?

It is highly unlikely that introducing this overlay of mismatched regulatory requirements will result in better consumer protections for class action participants.

What is clear is that in addition to having to deal with litigation funding agreements, solicitors’ costs agreements and disclosure statements, class members will also have to familiarise themselves with the Product Disclosure Statement for the case, the scheme’s constitution and make an application for investments in the scheme.

There is also the real risk that, given the red tape associated with the operation of AFSL and MIS schemes, including reporting requirements, the costs of litigation funding will have to increase to meet the added expenditure. This may force smaller litigation funders out of the Australian market. The resulting combination of increased costs and fewer players will likely have the ironic outcome of decreasing competition and increasing costs at the very time competition is placing downwards pressures on prices.

The better outcome would be to see the federal government engage with recommendations made by the ALRC following their in-depth review of the class action regime.

Those recommendations favour giving more powers to the court to intervene in litigation funding and legal cost arrangements as well as supporting the open class action regime.

The courts have a far better understanding of class action practice and also have a statutory role to supervise and protect the interests of group members.

In our view, the court is far better placed to deliver bespoke consumer protections to class members rather than a ‘one-size-fits-no-one’ regulatory regime. Regulation for regulations’ sake is the worst type of reform. As the facts show, class actions in Australia are working relatively well. Maintaining the current levels of competition in the market is key to ensuring the ongoing improvement in returns to class action participants.

This article appeared in the Asset Servicing Times.

September 15, 2020 // Press


Class action red tape will hurt the little guys, help big litigation funders

When large financiers and our biggest companies welcome new anti-competitive government red tape, Scott Morrison’s quiet Australians should become nervous.

The two largest litigation funders in the country have welcomed the government’s new class action regulations, which require litigation funders to hold an Australian Financial Services licence and, oddly, treat plaintiffs seeking compensation through a class action as investors in a managed investment scheme.

Why are big litigation funders applauding government red tape? Here’s a hint: Litigation Capital Management told shareholders the regulations would give it a “strategic advantage” by creating barriers to entry and reducing competition. The changes also have been welcomed by repeat class action defendant AMP, which distinguished itself as the biggest villain in the Hayne royal commission and is eager to escape accountability for misconduct.

Some suggest a political motivation for this change: to hurt the big plaintiff law firms Maurice Blackburn and Slater & Gordon, which routinely donate to Labor. It will do the opposite. Those industry giants are well-capitalised, have great market power and will gain even more. While they publicly oppose these regulations, in fact they are the only firms with the capital base and structure to self-fund class actions. Reducing the availability of litigation funding won’t hurt them but it will hurt smaller law firms that provide competition. Without this competition, Maurice Blackburn and Slater & Gordon’s market share will increase, and their prices and profits will rise.

This point was raised in 2016, when Treasury warned that imposing AFS licence and managed investment scheme requirements on the litigation funding industry would drive up costs for business and consumers, and force smaller firms out of the market, undermining competition. Four years ago, when Morrison was treasurer, he accepted this argument and left the exemptions in place. Quiet Australians will pay the price for reversing that decision.

The Australian Farmers Fighting Fund helped deliver justice for exporters affected by the shutdown of the live cattle trade by funding a class action. That fighting fund will be caught under these new regulations, a serious cause for concern for our worldclass farmers. If Bundaberg growers affected by the Paradise Dam debacle launch a class action, they will be considered to be “investing in an MIS”— an absurd construct.

The regulations will hurt small and family businesses such as Michel’s Patisserie franchisees in their class action against the Retail Food Group, which a bipartisan parliamentary committee accused of “exploitative fee gouging”. Landowners whose properties and livelihoods have been poisoned by toxic PFAS chemicals will pay more to have their day in court, as will the north Queensland primary producers fighting a class action against state government-owned energy companies.

Coalition MPs who defended negative gearing and franking credits may be surprised to learn the regulations will hit property investors, such as those facing ruin in the Opal Tower fiasco in Sydney. They will hurt self-funded retirees and mum-and-dad investors who benefit from shareholder class actions.

Corporations claim they face an explosion of litigation, but that is not right. The Australian Law Reform Commission found that class actions made up only 0.68 per cent of cases filed in the Federal Court. Since the Hayne royal commission, can anyone sensibly suggest companies such as AMP need less accountability?

Yes, some past litigation funding deals have delivered poor returns for group members, but these regulations have nothing to do with prices as the regulator, the Australian Securities & Investments Commission, has confirmed.

We live in extraordinary times and the scale of the COVID-19 response means the Prime Minister and Treasurer may be forgiven for mistakenly believing these regulations, cobbled together in haste, would hurt only the big Labor firms. Liberals normally are first to recognise that government regulation doesn’t reduce costs and if high prices are the problem, competition is the solution.

It is competition from mid-tier firms and smaller litigation funders — not regulation — that will drive better financial returns for class action group members.

For instance, it is competition that means group members in our company’s class action against Westpac are guaranteed to receive more than 90 per cent of the total payout recovered.

And it is only competition that will provide a long-term challenge to the power of the big Labor firms.

These ill-fitting regulations will serve only to cement their power and dominance.

 

This article first appeared in The Australian.

August 12, 2020 // Press


Class action brewing over hotel quarantine bungles

The fallout from the hotel quarantine fiasco is likely to end up in court with a leading class action firm already in discussion with businesses over a potential law suit.

The firm, Phi Finney and McDonald, said it had fielded inquiries by companies that have been hit hard during the second wave of coronavirus and associated lockdowns.

Managing director Ben Phi said that lawyers were now investigating the prospect of taking on the state government, which had “acknowledged that mistakes were made”.

“The evidence suggests that quarantine failures led to the second wave and all of the devastating personal and financial consequences that have followed,” he said.

“We have been approached by Victorian businesses who are interested in pursuing a class action. We are investigating the situation and following the evidence as it unfolds in the inquiry.”

An inquiry into the hotel quarantine scheme, led by former Family Court judge Jennifer Coate, is probing failures that led to COVID-19 infections being spread between guests and security guards and into the community.

Allegations include that some guards in hotels were poorly trained and mingled with returned travellers, that guests were allowed out against protocols, and that limited infectious disease controls were in place.

The worst clusters that stemmed from breaches of the scheme included at Rydges Hotel on Swanston St and the Stamford Plaza in the CBD.

Dozens of COVID-19 cases were linked back to those hotels, according to genomic sequencing by health officials.

Premier Daniel Andrews recently conceded that the second wave Victoria was confronting in its battle against coronavirus was largely attributable to problems with the hotel scheme.

Director of the Centre for Corporate Law at the University of Melbourne, Professor Ian Ramsay, said class actions against governments were relatively rare, but that there were some recent examples under way.

These included the robodebt case, which is aimed at the federal government for issuing incorrect Centrelink debt notices.

“We are seeing more cases where the government is the defendant,” Prof Ramsay said.

“One couldn’t predict any possible outcome … but given the current environment for class actions I am not at all surprised to hear there’s interest in this.”

Prof Ramsay said it made sense for law firms to look at the findings of the state inquiry into the hotel quarantine scheme before embarking on potential action, in a similar way to lawyers considering findings from ASIC investigations in corporate law cases.

Mr Phi said the capacity to run an action had been hampered by recent federal government regulations, which treated clients as “investors in a managed investment scheme who are trying to make a profit rather than obtain compensation for the incredible losses that have been suffered”.

“These regulations will increase costs, and it’s the Prime Minister’s own ‘Quiet Australians’ that will pay the price,” he said.

The inquiry into the hotel quarantine scheme is set to run until November.

 

This article appeared in the Herald Sun.

August 11, 2020 // Press


Westpac in crisis talks with largest investors amid money-laundering scandal

Westpac is holding crisis talks with its largest institutional investors as legal action over allegations by the money-laundering regulator that the bank breached laws more than 23m times ignited investigations by a raft of other corporate and financial regulators.

Shares in the nation’s second biggest bank continued to slide on Monday – down a further 1% to $24.50 at midday in a rising market – and credit ratings agency Moody’s issued a report saying the events unfolding were “ratings negative”.

The bank will also likely face a spate of class actions, with the first expected to be brought by law firm Phi Finney McDonald on behalf of shareholders.

Last Wednesday, Australia’s financial intelligence agency, Austrac, launched legal action against Westpac, accusing it of more than 23m breaches of anti-money laundering and counter-terrorism finance laws involving $11bn in transactions, including transfers potentially linked to child exploitation.

The case is likely to lead to fines in excess of $1bn. Commonwealth Bank has already agreed to a $700m fine as a result of failures to properly oversee the use of its ATM machines in breach of money-laundering controls. But its case involved just 53,000 breaches, compared with 23m for Westpac.

Westpac now faces further investigations, which could impact directly on the bank’s directors and senior executives.

November 25, 2019 // Press


LendLease class action backed by pension funds

Investors who purchased LendLease shares between 17 October 2017 and 25 February 2019 are encouraged to register at www.lendleaseclassaction.com.

Institutional investors from Australia and abroad have retained specialist class action law firm Phi Finney McDonald to prepare a shareholder class action against LendLease Corporation Limited (LendLease).

The claim relates to LendLease’s market announcements on 9 November 2018 and 25 February 2019 in which it disclosed a catastrophic underperformance in its engineering division.


BHP action whittled down to one

Ben Butler, The Australian

https://www.theaustralian.com.au/business/mining-energy/phi-finney-mcdonald-wins-right-to-pursue-class-action-against-bhp-over-samarco-dam-disaster/news-story/adc01e934d2ba582a6beeca685546273

Boutique law firm Phi Finney McDonald has beaten two other law firms vying for the right to run a shareholder class action against BHP over the Samarco dam disaster. Federal Court judge Mark Moshinsky this morning ruled that Phi Finney McDonald’s case should go ahead and stayed proceedings helmed by labour law powerhouse Maurice Blackburn and national firm Johnson Winter & Slattery.

December 19, 2018 // Press


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