Statutory price cap proposal: leaving victims of wrongdoing with nowhere to go

The Australian Government is considering the merits of legislating a minimum return to group members in funded class actions, potentially as high as 70 per cent of gross proceeds.

Australia’s Treasury and the Attorney General’s Departments are currently consulting on recommendation 20 from the 2020 inquiry by the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) into class actions and litigation funding. Specifically, the committee recommended consultation on the best way to guarantee a statutory minimum return, whether this should be set at 70 per cent of gross returns, and whether a graduated approach should be considered to ensure even higher returns to group members in more straightforward cases.

The origin and intellectual basis of the committee’s recommendation is a mystery, apparently lost in the fog of politics. The committee majority attributes the idea of a 70 per cent minimum to some (unspecified) class action law firms and litigation funders; more accurately, the recommendation appears to have arisen from a newspaper article that appeared as the committee report was being drafted.

More importantly, the introduction of a 70 per cent minimum would be a completely arbitrary measure and is not supported by reference to any analysis of the negative implications for the funding of class actions or the risks being assumed by litigation funders. As noted by PwC in supplementary economic analysis commissioned by Omni Bridgeway (appended to the company’s submission to the current consultation process), “the mooted 70% return to class members does not appear to be based in any empirical analysis of actual case outcomes”.

As PwC also notes, it has been accepted in Australia since the mid-1990s, following the landmark Hilmer Review, that government intervention in markets should only occur where there is market failure.  Yet there is no evidence of market failure in the litigation funding industry in which there are few complaints by group members and there are already significant checks and balances in place, including increasing intervention by the courts in the class action settlement approval process. Despite rhetoric to the contrary from the big business lobby, as I have previously noted there is no evidence of what has been described as ‘opportunistic class actions’ or an ‘explosion’ of class actions. What’s more, competition over recent years has pushed down funding rates and, with the significant regulatory changes made by the Government in 2020, litigation funders are now required to hold an Australian Financial Services Licence and to comply with the Managed Investment Scheme regime for class actions.

PwC’s detailed analysis of historical class action datasets shows that a 70 per cent minimum return to group members is likely to substantially constrain the viability of future funded class actions in Australia. It therefore risks damaging the very people the regime is ostensibly seeking to protect – potential group members who will have their options to access justice curtailed.  Their analysis illustrates that a 70 per cent minimum return would mean 91 per cent of cases would be adversely impacted – either because they would not even cover legal costs (i.e. zero return to the funder) or the funder’s commission would have been reduced.

The approach to impose a statutory minimum across all funded class actions that goes beyond a basic ‘floor’ of 50 per cent is fundamentally flawed because it assumes that all class actions are the same. A minimum does not differentiate between the variable risk profiles of different types of class actions. Factors affecting those risk profiles include difficulties of proof or law, number of defendants (and consequent adverse costs risk), size of claim, cost of pursuing claims, complexity of assessing group member losses and recoverability.

A 30 per cent cap on the returns to funders inclusive of legal costs will result in an inequality of resources between claimants and defendants. It is foreseeable that defendants may seek to defeat a claim by “deep pocketing” tactics, that is, prolonging and/or complicating proceedings (thereby increasing cost) making it unviable for group members to pursue their claim.

For many years Omni Bridgeway has striven to return at least 50 per cent of the gross proceeds to group members. This has not been designed to arbitrarily change the amount going to successful group members across the board (in the majority of cases group members receive more than 50 per cent in any event) but rather to operate as a backstop to protect group members in the event that, despite settlement, the gross proceeds are materially smaller than was expected at the point of funding. In that context, and recognising the importance of ongoing public confidence in the class action system, Omni Bridgeway recommended a 50 per cent minimum return to group members to the PJCCFS’ 2020 inquiry, intended to operate as guidance to the court or a rebuttable presumption.

While the Treasury and Attorney-General’s Departments are yet to publish the submissions they have received, a number of parties have publicly released their responses. All appear to support the important role of class actions in providing access to justice and the legitimate role of litigation funders in this regard. While supporting the objectives of enhancing protections for class action members and improving access to justice, the Law Council of Australia expresses its concern with the 70 per cent minimum proposal and, more generally, that the introduction of any minimum return suffers from arbitrariness. It sees the introduction of a graduated approach as likely to increase the risks of the proposed reform. The Law Society of South Australia expresses similar reservations with a 70 per cent minimum return but that if a minimum must be selected 50 per cent should be favoured.  

Business lobbyists appear to have taken contradictory paths. Ai Group not only agrees with a 70 per cent minimum allocation of gross proceeds to group members but believes regulation should prescribe criteria that courts would be required to consider in deciding whether to increase this to 80 per cent or more. Whereas the Australian Institute of Company Directors (AICD) offers a more thoughtful and nuanced view, suggesting that while a statutory minimum return is sound in principle, it is difficult to discern what level this should be and that a 50 per cent backstop should be established. AICD also expresses support for a graduated approach and enhanced powers for the Court to approve a litigation funding agreement.

A number of funders - Burford Capital, LCM and Woodsford Litigation Funding - generally hold the view that a regulated minimum return will make many class actions uneconomic to fund, the 70 per cent figure is arbitrary with no supporting evidence, and the courts are already effectively discharging the role of approving settlements that are fair and reasonable.

While the two Departments will weigh up these arguments, it will be for the Government and ultimately Australia’s parliament to cut through the rhetoric and ensure there remains a viable route to justice for those whose legal rights are abrogated.