30% cap on fees and funder returns in class actions proposed
The Federal Government has today released draft legislation to restrict the combination of litigation funders’ returns and lawyers’ fees to 30% of any payout in class actions. Just one week has been allowed for consultation.
This move was first proposed by a highly partisan Parliamentary Joint Committee on litigation funding last year. It is the third significant step against class actions and litigation funding by the Government since mid-2020.
Back in May 2020 (the day after Treasury’s $68bn Jobkeeper error was revealed) Josh Frydenburg announced reforms to crack down on class actions and litigation funding, which came into effect in August 2020. Those changes require funders to hold Australian Financial Services licences and class actions to operate as managed investment schemes under the Corporations Act 2001. We described those changes, in particular regulation as an MIS, as inapt at the time and maintain that view.
On 25 May 2020 the Federal Government rushed through ‘temporary’ changes to continuous disclosure laws in response to the COVID-19 pandemic. In August 2021 those changes became permanent, raising the legal bar for establishing liability for a breach of the disclosure regime. These changes will have a material impact on shareholder class actions, impacting the assessment of viability and therefore willingness to fund.
Now the 30% return ‘cap’ on costs and funding commission is proposed. Our initial review of the draft legislation is that this ‘cap’ operates as a rebuttable presumption that anything over 30% is not ‘fair and reasonable’, feeding into the requirement of court approval for the funding commission and costs.
While this leaves the door open to obtain approval of a greater amount than 30% in a specific case, this restriction will have a material impact on case viability and the risk profile of class actions. We believe it will lead to less actions being taken.
While members of the Federal Government like to refer to the ‘feeding frenzy’ of lawyers and funders in the class action space, what we have seen over the last 18 months has been ideological frenzy amongst politicians, lobbyists and major industry players, in response to the Federal Government’s assault. The Government has moved with a sense of purpose that the populace might wish was applied to other high priority social and political issues.
We don’t deny that there have been class actions with poor outcomes or cases with little regard for the interests of class members. In some instances, these have involved negligible returns to class members. While we are sceptical of the motivations behind the reforms, and concerned about their impact on access to justice, there are elements of the industry which require examination and oversight.
The common thread we see in justification of these changes is a purported intention to deliver better outcomes to class members, through a greater return to them.
Perversely, a measure that may address this purported concern, is likely to be the next target. Contingency fees. These can create an alignment of interest between class members and their lawyers – returns maximised by the earliest possible positive outcome for proportionate legal cost. Under a traditional or ‘no-win-no-fee’ model, lawyers can be rewarded for inefficiency, with funding returns multiplied upon any inefficiency. But Victoria’s fledgling contingency fee regime could be the fourth target of the Federal Government.
For now, we finish with the Treasurer and his core justification for the ‘cap’ (emphasis added) – ‘these reforms will maintain access to justice for victims while ensuring litigation funders and lawyers are not excessively remunerated at the expense of class members.’
That is, provided the class action is brought. Because if the case is never brought because the ‘cap’ makes it unviable, the victims get nothing. You can’t get more of nothing.
How can you miss out on something which you cannot otherwise get?
Dan Mackay, Director Mackay Chapman
