The Situation: Over the past several years, the Australian Government has introduced numerous major law reforms in the class actions space. These efforts included regulations covering litigation funders, who fund many of the major class actions filed in Australia, as we reported on here. The regulations, introduced in 2020, sought to reinforce a 2009 decision of the Full Court of the Federal Court of Australia that litigation funding, when utilised in a class action, was a "managed investment scheme" under the Corporations Act 2001 (Cth) ("Corporations Act"). This, in turn, made the requirements for operating a managed investment scheme applicable to funded class actions.
The Decision: In a recent decision (LCM Funding Pty Ltd v Stanwell Corporation Limited  FCAFC 103), the Full Court overturned its 2009 holding and found that third-party funded class actions were not managed investment schemes and not subject to regulation pursuant to Chapter 5C of the Corporations Act. In addition, following the Federal Election held in late May 2022, the Labor Party assumed control of the Australian Government and announced its intention to wind back regulation of litigation funding through the Corporations Act, among other things.
Looking Ahead: The Full Court's latest decision removes one of the main sources of the litigation funding regulation. There remain some outstanding issues, such as whether litigation funders are required to hold an Australian Financial Services Licence, which will need to be clarified. Further, other sources of regulation, such as judicial oversight of funder conduct in class actions, remain.
More Detail: Regulation of Litigation Funding in Class Actions
In 2009, the Full Court of the Federal Court of Australia, in Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd  FCAFC 147, held that arrangements between litigation funders, lawyers and class members in class actions were "managed investment schemes" for the purpose of the Corporations Act. In response, the former Labor Party-led Australian Government introduced regulations which excluded litigation funding schemes from the definition of "managed investments schemes" and exempted providers of litigation funding from the requirement to hold an Australian Financial Services Licence ("AFSL"), provided that they maintained adequate arrangements for managing conflicts of interest.
Australia subsequently experienced major growth in class action activity, particularly third-party funded class actions, which prompted a reconsideration of the regulatory position by a subsequent (Coalition-led) government.
To that end, on 22 May 2020, the Australian Government announced that it would subject litigation funders to greater regulatory oversight by removing the exemptions previously afforded to funders. To do so, it enacted the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth). The regulations had the effect that any litigation funding scheme entered into on or after 22 August 2020 was classified as a "managed investment scheme" and the litigation funder needed to hold an AFSL, and so came within the remit of the Australian Securities and Investments Commission, thus increasing regulatory scrutiny of litigation funders.
The government continued to develop regulation for litigation funding and, in 2021, put forward the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021 (Cth). Amongst its proposed and significant reforms was an amendment to make clear that 'a class action litigation funding scheme' is a "managed investment scheme" so that reliance on Brookfield Multiplex was no longer needed. The bill was not enacted prior to the calling of the 2022 Federal Election which, as noted above, saw a change in government.
Full Court Changes Direction
LCM Funding Pty Ltd v Stanwell Corporation Limited  FCAFC 103 occurred in the context of a competition law (misuse of market power) class action brought by Stillwater Pastoral Company Pty Ltd ("Stillwater") on behalf of 61,000 individual class members who entered into funding agreements with LCM Funding, a litigation funder.
The funding agreements with each class member are identical in their terms. Each class member agrees that they must retain the lawyers that are retained by Stillwater with LCM Funding's approval to prosecute their claims and to pay contingent fees to LCM Funding from any recovery. LCM Funding agrees to pay costs, including adverse costs and security for costs, and has the right to engage with Stillwater about the steps to be taken in preparing, conducting, abandoning, postponing or resolving the claims. The terms of the funding arrangement were accepted as relevantly identical to the scheme that was under consideration in Brookfield Multiplex.
The class action defendants alleged that the funding arrangement was an unregistered "managed investment scheme" and sought orders restraining its operation.
The Full Court in LCM Funding determined that the decision of the majority in Brookfield Multiplex was plainly wrong. The task of construing the definition of "managed investment scheme" in s 9 of the Corporations Act was said to commence with consideration of the text of the provision itself, as well as its context, including the general purpose and policy of the provision. The Full Court held that the majority in Brookfield Multiplex adopted an overly technical approach to each element of the definition and paid too little attention to the purpose of the regime. Moreover, a number of aspects of the regime were in conflict with the requirements for class actions in Part IVA of the Federal Court of Australia Act 1976 (Cth). In short, the characterisation of litigation funding arrangements as managed investment schemes was described as "a case of placing a square peg into a round hole".
The determination that third-party funded class actions are not managed investment schemes now raises the question of what is an appropriate regime for regulating litigation funding. The newly elected Australian Government has indicated that it favours removing regulation of litigation funding through the Corporations Act and empowering the courts to provide oversight. While the courts have exercised oversight in the past, that oversight has limitations. For example, the power to review and alter funding commissions is presently uncertain due to conflicting judgments. Legislative reform appears likely, and we will continue to monitor and report on developments.
Three Key Takeaways
- Third-party funded class actions in Australia are no longer classified as managed investment schemes. There remain some outstanding issues, such as whether litigation funders are required to hold an AFSL, which will need to be clarified over the coming period.
- The newly elected Australian Government has indicated that it favours removing regulation of litigation funding through the Corporations Act 2001 (Cth) and empowering the courts to provide oversight. The details of the government's proposals, and their consequential effect on class action space participants, remain to be seen. At this stage, it is anticipated that the effect of the court's decision in LCM Funding and any further reforms to be proposed by the government will likely reduce the regulatory burden and associated costs for litigation funders.
- Australia remains an extremely favourable environment for class action filings (particularly in the State of Victoria, where lawyers are now able to file class actions on a contingency fee basis, albeit one that requires court approval), and third-party litigation funders are expected to remain highly active in the class actions space. We will continue to monitor and report on developments, including any further reforms proposed by the Australian Government.