Laboring alone
Labor is conspicuously alone in opposing reforms that would bring litigation funders under the same regulatory umbrella as other financial service providers. By James Mathias.
It would seem odd to anyone that the Australian Labor Party stands for less regulation and oversight of a financial services product (especially post Hayne Royal Commission), and that they would be pushing hard to remove requirements for certain providers of financial products not to hold an Australian Financial Services Licence (AFSL). But this is 2020 and anything, no matter how bizarre, is possible.
It is in the Senate where battle lines have been drawn by Labor’s Deb O’Neill who on 31 August moved a motion to strike out the Government’s reforms to the third-party litigation financing industry (it is still yet to be voted on). She opposes the Government now requiring providers to hold an AFSL and that their products be registered as a Managed Investment Scheme (MIS).
O’Neill’s objection in the Senate came just nine days after the Government’s regulation came into effect following many years of commentary that it was necessary and is a key recommendation of Menzies Research Centre report Litigation Nation.
More questionable to O’Neill’s position is that even Australia’s largest litigation funder, Omni Bridgeway, is in favour of these reforms, with CEO Andrew Saker penning or being quoted in more than 10 articles supporting the new arrangements. In an Op Ed in The Australian on 7 September Saker wrote: “Omni Bridgeway has long supported the introduction of a licensing regime for all litigation funders operating in Australia … Omni Bridgeway supports the proposal put forward by Treasurer Josh Frydenberg that all litigation funders operating in Australia obtain an AFSL”.
Further to the support of Omni Bridgeway, these reforms find similar support from the ASX who say: “The removal of the licensing exemption for litigation funders is a sensible step. It will ensure that litigation funders are subject to the same regulatory framework and oversight as other financial services providers.” Further, the Australian Industry Group (AiGroup) rightly point out that “Litigation funders are providers of financial products and services, and they need to be licensed like other providers”. And finally, the Australian Institute of Company Directors says: “Funders should be required to join the Australian Financial Complaints Authority.”
It is not just industry who believe that third party litigation funders offer a ‘financial product’ or ‘credit facility’ but none other than the Federal Court of Australia, who in 2009 ruled that the service they offer constituted exactly that, and therefore registration was required under the Corporations Act with ASIC as a Managed Investment Scheme (MIS).
Just as they do now, following the ruling of the Federal Court in 2009, Labor took great offence that the litigation funders be subject to these basic financial services licence requirements and in 2010 announced that the sector would be exempt.
Following the exemption coming into effect in 2013, the results were plain to see. The number of class actions filed more than doubled from 17 in FY 2014 to 40 in FY 2015 and by FY 2019 that number had reached a staggering 54 actions. Operating in a regulatory black hole meant that funders flocked to Australia, which according to Herbert Smith Freehills is the second most attractive class action jurisdiction globally. The percentage of class actions backed by litigation funders pre-Labor’s exemption was around 33 per cent – allowing the industry free reign meant that by 2019 that number had grown to 72 per cent.
As ‘Litigation Nation’ outlined, there are at least 33 litigation funders operating in Australia. Most of these are foreign entities, or locally created companies investing on behalf of offshore funds.
Similar to private equity funds, these offshore funds are often structured as investment fund vehicles and raise money from external investors – usually sophisticated investors and pension funds. Some funders invest through advantageous tax jurisdictions, including Jersey, the United Kingdom and the Cayman Islands.
Even funders that reside in Australia have restructured their operations to act more like international fund managers to access foreign capital. For example, Omni Bridgeway’s most recently completed fund, Fund 5, is run through a Cayman Island based entity. It has raised investments of up to US$1 billion from foreign investors to deploy into Australia and the region.
ASX disclosures indicate that major investors in this fund include investment firms in Singapore, Europe and North America, including a cornerstone investment from endowment funds associated with Harvard University.
Even the Treasury Department highlights that we must be “addressing the risk arising from a large number of new funders – including those based outside Australia – that have shown insufficient transparency and accountability regarding their business models, competence and finances, alongside increasingly diverse and opaque funding arrangements.”
The absurdity of O’Neill’s and Labor’s strong opposition to this, is that these requirements only require litigation funders to be held to the same standards as other financial services providers, no more and no less. That is that they have disclosure obligations (including a requirement to issue Product Disclosure Statements); adhere to dispute resolution mechanisms; and have increasing levels of professional competence, training and resourcing. Additionally, litigation funders would be subject to ASIC regulatory oversight, with penalties attached to instances of compliance failure.
Embarrassingly, O’Neill disagrees, saying in a Parliamentary Inquiry into the industry on August 3 that “In this attack on access to justice through litigation funders and curtailment of litigation funders, it's one thing to ask for them to have an Australian financial services licence; it's another thing to recommend introducing the managed investment scheme rules.”
Just add this to the list of things you never thought possible in 2020 – the Labor party, against the calls of industry, the courts and academics is strongly against certain companies providing financial products, many of them multi-national, some run through tax havens that lack any meaningful regulatory requirements or oversights. Go figure.