The inquiry will focus on the level of regulation of the class action and litigation funding industry, and whether our current policy settings are leading to poor justice outcomes for plaintiffs.
Since the inquiry was first floated earlier this year, the terms of reference have been expanded to include the potential impact of the class action industry on vulnerable Australian businesses already suffering the impacts of the COVID-19 pandemic.
The AICD welcomes the inquiry, and looks forward to contributing. In addition to long held concerns about insufficient regulation of litigation funders, the AICD is particularly concerned about the ongoing proliferation of securities class actions, driven by the interaction between our continuous disclosure and misleading and deceptive laws and the class actions regime.
Ultimately, securities class actions negatively impact shareholders in a listed company by distracting board and management attention, and encouraging a risk-averse culture in Australian boardrooms. The prevalence of securities class actions is also a key contributor to the current crisis in the D&O insurance market, which has seen insurance become prohibitively expensive for many entities.
In light of the current COVID-19 crisis, it is critical that regulatory settings support rather than hold back a strong economic recovery.
2018 ALRC inquiry
The parliamentary inquiry will follow the inquiry of the Australian Law Reform Commission (ALRC) into class action proceedings and third party litigation funders, which reported in early 2019. The ALRC inquiry involved a detailed review of the landscape and warned of unintended legal and economic consequences as a result of the interaction between our continuous disclosure and class action rules.
In its final report, the ALRC made a number of recommendations, including that a review of the legal and economic impacts of the substantive law underpinning securities class actions be undertaken (see here).
The Government has made very clear its concerns about the current system, including excessively high returns being made by litigation funders at the expense of plaintiffs.
Attorney-General Christian Porter has referred to the ALRC’s finding that the median return to group members in funded matters was 51% of the settlement award, compared to 85% in unfunded proceedings, and argued that this is clear evidence that the system is not delivering fair and equitable outcomes.
Labor has opposed the new parliamentary inquiry, with Shadow Attorney-General Mark Dreyfus QC defending the litigation funding and class actions regime as providing a vital path to justice for ordinary Australians trying to uphold their rights, and criticising the Government for its failure to respond to the ALRC’s report.
In opposing the inquiry, Mr Dreyfus emphasised that Labor was not suggesting that the legal regime governing class action proceedings is perfect and indicated that it is not opposed to sensible law reform to address the risk of predatory actions against listed companies during the COVID-19 crisis.
The AICD has previously encouraged the Government to consider stronger regulation of litigation funders, and has been a strong supporter of the ALRC’s recommendation for a review into Australia's continuous disclosure and class actions regime.
While Australia’s class actions framework provides an accessible mechanism for individuals to achieve resolution of disputes and access to justice within Australia’s court system, the regime, particularly as it relates to securities class actions, is increasingly subjecting companies, and ongoing shareholders, to unintended consequences. Further, with litigation funding increasingly being seen as a highly lucrative investment for funders, the AICD is concerned that class actions are less about access to justice but rather about financial returns.
Ultimately, our regulatory settings should promote robust market disclosure practices (and facilitate access to justice) without driving adverse consequences for organisations, boards, ongoing shareholders and the broader economy.
In recognition of the particular disclosure challenges presented by the current volatile and uncertain environment, the AICD has been advocating to Government for an urgent and targeted solution. Our proposal can be accessed here. The inquiry will also offer an opportune time to examine whether more permanent reforms are necessary such as introducing a due diligence defence for entities, or more fundamentally whether enforcement of continuous disclosure laws should solely lie with ASIC, thereby prohibiting private actions.
Scope of the inquiry
The terms of reference for the inquiry are broad and encompass, amongst other things:
- the impact of litigation funding on the damages and other compensation received by class members in class actions funded by litigation funders;
- the regulation and oversight of the litigation funding industry and litigation funding agreements;
- factors driving the increasing prevalence of class action proceedings in Australia;
- the present and potential future impact of class actions on the Australian economy; and
- the potential impact of Australia’s current class action industry on vulnerable Australian businesses already suffering the impacts of the COVID-19 pandemic.
The Committee is due to report back to Parliament by 7 December.
The Government has also indicated that it will shortly release its response to the ALRC inquiry.
The AICD is looking forward to engaging with the inquiry and will keep members updated.