Report Shows Litigation Funding Impacting Compensation Claims
The Samuel Griffith Society is calling for a review of the rules surrounding ‘no win, no fee’ terms for lawyers and regulation of litigation funders, stating that they are in need of an overhaul.
A recent review by the Society suggests that there needs to be a change in the rules governing class action lawsuits, as a significant portion of the $1 billion settlement funds paid in the 2019/20 financial year went to private underwriters and law firms.
Established in 1992, the Society focuses on researching constitutional issues.
According to authors Xavier Boffa and Henry Davis, litigation funding, where a finance company sponsors plaintiffs by covering legal fees and other costs in exchange for a share of the settlement, was initially developed to ensure that lack of funds would not hinder justice for potential plaintiffs.
However, the report suggests that the balance has shifted too far in favor of the interests of litigation funders and, potentially, plaintiff law firms.
The report highlights a specific class action against Colonial First State, supported by litigation funder Augusta, where the company stands to make $23 million in return, while class members are expected to receive only $800 on average.
Litigation Funding Impacting Compensation
While litigation funding may increase access to the courts, it often results in smaller compensation amounts for plaintiffs.
In Australian class actions backed by third-party funding, the average commission is 25 percent, with costs totaling 21 percent, which are deducted from the plaintiff’s court winnings.
A 2019 inquiry by the Australia Law Reform Commission found that in cases where members received less than 50 percent of the settlement amount, a litigation funder had usually underwritten the case.
Conversely, over 90 percent of cases without litigation funding resulted in plaintiffs receiving more than 75 percent of the settlement.
Legal Activity in Victoria
A 2020 law change in Victoria made it easier for class actions to receive litigation funding, leading to a surge in cases in the state.
By the end of the 2022/23 financial year, almost 36 percent of all class action litigation in Australia was filed in the Victorian Supreme Court, a significant increase from 6.9 percent in the 2018/19 financial year.
Federal Court rules also allow for class actions to be underwritten by litigation funders, making Australia one of the largest jurisdictions for class actions globally, following the United States.
In July of this year, the Federal Court extended the availability of contingency fees to both litigation funders and, for the first time, law firms, similar to the Victorian model. This decision is currently under appeal in the High Court.
The report’s authors emphasize that the substantial profits made by litigation funders restrict ‘access to justice’ in a broader sense, as class members often lose a significant portion of their settlement monies.
Reform Recommendations
One alternative to commercial litigation funders proposed by the Australian Law Reform Commission in 1988 is statutory funds at either a federal or state level, though this suggestion is not included in the Society’s report recommendations.
Instead, the report advises the complete elimination of the contingency fee model in Victoria, a review of civil procedure rules permitting contingency fees in the Federal Court, and a strict regulatory regime for third-party litigation funders, including disclosure of funding sources.
The authors also recommend reversing the Albanese government’s relaxation of regulation on litigation funders imposed by the previous Coalition government, which they deem problematic.
They propose that litigation funders should be required to hold Australian Financial Services Licences and be regulated by ASIC, and that litigation funding schemes should be classified as managed investment schemes within the Corporations Act.
Additionally, they suggest reinstating regulations that mandated litigation financiers to participate in anti-money laundering reporting.
The current system, according to the report’s authors, has fueled the commercialization of class action lawsuits, necessitating greater transparency and clarity regarding the influence of litigation funders on the cases they underwrite.
