Draft regulations for litigation funders are set to apply from next month. Justin Whealing looks at whether this will inhibit access to justice or make them more financially accountable.

In August, Australia's largest litigation funder by quite some distance, posted stellar results for the 2010-11 financial year. Total revenue was up 88 per cent to over $40 million, while net profit increased by 92 per cent to almost $23 million.

With its dominant position in the litigation funding market achieved through bankrolling some of Australia's most well known class actions, including the Sons of Gwalia and Westpoint class actions, executive director John Walker is relaxed about the prospect of tighter regulations for the industry.

"As the industry grows, there will be a greater risk of default, in the sense that the expectations of consumers will not be met," he says from his office in Martin Place in Sydney. "We are listed and we are licensed and people understand where we are at, but other competitors don't feel they have those obligations.

"It is not so much of a problem now, but as the market gets bigger, with more consumers accessing litigation funding, we can see that the market needs protection from regulation."

The litigation funding business model was turned upside down by the judgment in October 2009 by a full-bench of the Federal Court in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd. In essence, the Court held that private entities involved in litigation were participating in an unregistered managed investment scheme and were therefore in breach of the Corporations Act.

This ruling meant that litigation funders would be required to hold Australian Financial Services Licenses, threatening the conduct of current and future class actions.

Chris Bowen, the Minister for Corporate Law at the time, came to the rescue of the funders and plaintiffs involved in large scale litigation by removing class actions and proof of debt arrangements from the definition of a managed investment scheme in the Act.

The Department of Treasury then called for submissions into the exposure draft of its suggested amendments to the Corporations Act, with IMF and the Law Council of Australia amongst six organisations that made formal submissions before the closing period in August.

These draft regulations are expected to apply from 1 October this year, and Walker welcomes any moves to require litigation funders to hold an Australian Financial Services Licence (AFSL), as IMF has held such a license since 2005.

"By just focusing on one particular thing, mainly the management of conflict issues, the draft regulations don't deal with all the other issues," he says.

"They are trying to tie in some of those other issues into an exemption that enables you not to be licensed if you come within that exemption. But those things mean that some days you are exempted, while on other days you might not be, so it is quite difficult to run multi-million dollar projects that require you to understand clearly what your regulatory obligations are."

What the law firms think

It is no surprise that the plaintiff law firms on the whole support the exemptions granted to litigation funders, while many litigation lawyers from top-tier law firms that sit at the opposite side of the table think there should be more regulation.

"It is clear the Government is thinking about this issue, but there is a very real debate about if what is proposed in those draft regulations is the right way to go," says Greg Williams, a litigation and dispute resolution partner with Clayton Utz who describes the current levels of regulation on litigation funders as being "inadequate".

Williams cites the exclusion of litigation funders from being required to hold an AFSL that poses the major concern to the integrity of the litigation funding system.

"I think the proposal has a number of problems, including leaving the industry in an under regulated position," he says. "My view is that litigation funders should be required to hold licenses, and there should be a question as to whether there should be some additional regulatory obligations to cover the fact that they don't hold a financial services license."

Slater & Gordon practice group head Ben Phi is leading his firm's team on the class action against Nufarm Limited. He believes that many of the voices calling for more regulation of litigation funders have a vested interest in making those claims.

"It is interesting that the largest critics or those calling for the greatest regulation are those who have an interest in either reducing the number of class actions overall or in reducing the size of the litigation funding market," he says. "In our view, defendants are properly concerned to make sure their clients are adequately protected in the event they win in a litigation matter and are entitled to a costs order.

"Beyond that, it is questionable as to what extent they are properly voicing concerns on behalf of group members in class action proceedings. None have been able to point to any situation in which someone has been poorly advised."