BILL TO CHANGE LAWS REGARDING CLASS ACTIONS AND FUNDING

PARLIAMENTARY JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES INQUIRY INTO THE CORPORATIONS AMENDMENT (IMPROVING OUTCOMES FOR LITIGATION FUNDING PARTICIPANTS) BILL 2021

SUBMISSION OF LITIGATION CAPITAL MANAGEMENT LIMITED

5 November 2021

Litigation Capital Management Limited ABN 13 608 667 509

Registered Office: Level 12, The Chifley Tower, 2 Chifley Square Sydney NSW 2000 Australia

[phone] | www.lcmfinance.com

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SUMMARY OF LCM SUBMISSION

1. Proscribed minimum returns for class members are a wolf in sheep's clothing. On their face, they appear to offer group members added protection, while in reality they take away those group members' very ability to seek redress for wrongs that they have suffered. (See Part B, page 3)
2. A disciplined, evidence-based analysis of the proposed changes would show that they will undoubtedly prevent hundreds of thousands of Australians from pursuing their meritorious claims.
3. The reality of class actions is that they are expensive to progress - they often cost between $5million and $10million to finalise. Sometimes less, often more. Because of this, a proscribed 70% return to class members will mean that most class actions that seek less than $100million in damages will be uncommercial to fund and will not obtain funding from reputable funders. The Bill will thereby shut the door on funding for the bulk of meritorious class action claims that have historically progressed with the benefit of funding assistance.
4. Limiting the claimants' costs is not the answer. It is not 'fair'. If claimants try to restrict their costs in order to squeeze their claim into the funding model imposed by the Bill, they will be at a colossal tactical disadvantage when facing a well-heeled defendant with unlimited resources and large, highly skilled legal teams. The Bill would create a situation where the claimants are simply 'out-gunned'.
5. LCM has long advocated for relevant and effective regulation of the litigation funding industry. However, the managed investment scheme regime is not relevant and it is not effective for the funding of class actions. At best, the regime produces no discernible benefit to group members and, at worst, it is impossible or impractical to comply with. (See Part C, page 5).
6. The Bill encourages 'closed' class actions, to the detriment of claimants, defendants and Court processes. (See Part D, page 6).
7. The Bill otherwise unreasonably fetters judicial discretion, introduces impossibly vague civil penalty provisions and incorporates provisions that are open to Constitutional and other challenges. (See Part E, page 6).
8. The Bill has not had the benefit of sufficient consideration and meaningful consultation. It needs finessing in some parts and it needs fundamental rework in others.

PART A: LITIGATION CAPITAL MANAGEMENT LTD

1. Litigation Capital Management Limited and its subsidiaries ("LCM") is a provider of litigation finance products and from that perspective makes the following submission in response to the Parliamentary Joint Committee ("PJC") on Corporations and Financial Services Inquiry ("Inquiry") into the Corporations Amendment (Improving Outcomes For Litigation Funding Participants) Bill 2021 ("Bill").

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1. Founded in 1998, LCM was one of the first professional litigation funders in Australia, and it is one of the longest-standing litigation funders globally. LCM holds an Australian Financial Services Licence and is a publicly listed Australian company, headquartered in Sydney and with offices in Melbourne, Brisbane, Singapore and London.
2. Since its inception, LCM has continued to assist claimants to pursue meritorious claims and recover funds from the legal avenues and actions available to them. LCM funds commercial, insolvency and arbitral proceedings, as well as representative actions.

PART B: MINIMUM RETURNS TO CLASS MEMBERS

1. LCM submits that no cogent, evidence-based consideration has been given to the question of whether a rebuttable presumption of minimum returns to class members is, on the whole, going to protect or benefit class action group members, or maintain access to justice.
2. It is LCM's submission that if a disciplined analysis were undertaken, it would make clear that such a change, if effected, will undoubtedly prevent hundreds of thousands of Australians from seeking redress for wrongs that have affected them.
3. LCM does not doubt that if a proscribed minimum return to group members is introduced, in some of the class actions that nevertheless receive funding, the returns to group members may be higher than those they would have otherwise achieved. However, LCM stresses that the number of such class actions, i.e. class actions that nevertheless receive funding, will dramatically decrease.
4. Importantly, if meritorious actions are not funded, it does not mean that they will progress as unfunded claims. LCM submits that a very small percentage of such claims would be commenced and progress to a resolution unfunded. That small percentage would also be likely to be progressed by plaintiff firms on a contingency basis in the Supreme Court of Victoria, where the commissions such firms can charge are not capped.
5. As noted in the PJC December 2020 Report "Litigation funding and the regulation of the class action industry" ("PJC Report") (at 5.5):

"…the committee recognises that, in many instances, a class action could not proceed in Australia without a litigation funder."

How does the Bill restrict funding for class actions?

1. Funders are selective about the claims that they fund1, and a funder's appetite for supporting class actions is not inelastic.
2. Funders do not have to fund class actions, and if class action regulation is changed in a way that shifts the balance between risk and return beyond acceptable limits, funders simply will not continue to fund these claims and will instead continue to increase their investments in other claim types such as insolvency, arbitration and commercial litigation (for which there is a developed litigation funding market in both Australia and globally).

1 By way of example, LCM provides funding to only between 3% and 7% of the applications it receives

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1. The cost of doing pursuing a class action claim is usually more than $5million. It is often more than $10million. Class action funding is also a highly specialised, risky and almost entirely illiquid investment. It is in this context that funders make decisions as to whether to agree to fund a proceeding.
2. Relevantly to the Bill, when considering a claim for funding, one of the key matters that funders carefully review is the 'proportionality' between the budgeted investment sum and the likely recovery. Reputable funders do not accept matters for funding if it is not clear that the size of the claim is sufficient to allow for a) the full legal spend anticipated,
3. 1. the funding commission, c) the bulk of the recovery being paid to the claimants and
   1. a "buffer" to allow for settlement discounts, increases in costs and potential reductions in claim value as the claim develops.
4. Because of this, the use of a predetermined minimum for class member returns has a direct impact on the size of the claim that the funder is able to accept as sufficiently 'proportionate' to meet its criteria for funding.
5. A worked demonstration of a funder's 'proportionality' analysis is enclosed at Annexure A to this Submission. Applying that analysis to realistic class action budget figures arrives at the following claim size parameters:

Budget

Minimum required claim size

$5,000,000 $125,000,000

$10,000,000 $250,000,000

$15,000,000$375,000,000

1. The above demonstrates that if 70% minimum returns were to be introduced, class action schemes with claims that are smaller than the minimums noted above simply will not be able to obtain funding from reputable funders.
2. Empirical evidence2 further shows that this would affect the bulk of class actions that have historically progressed with the benefit of funding assistance.

Lowering claimants' costs - not a solution

1. Although the above comments are dependent on the premise that class actions are very expensive to progress, LCM submits that any responding suggestion that lawyers and funders should limit those costs would overlook the nature of a class action proceeding.
2. LCM submits that in Australia's adversarial class action system, restricting the claimants' costs is not an option. It is not 'fair'.
3. If claimants try to restrict their costs in order to squeeze their claim into the funding model imposed by the Bill, they would be at a colossal tactical disadvantage when facing a well-heeled defendant with unlimited resources and large, highly skilled legal teams. The Bill would ensure that the claimants are simply 'out-gunned'.

2 See, for example, Professor Vince Morabito's data in "Post-MoneyMax Settlements in Funded Part IVA Proceedings" (December 2020); PWC Report "Models for the Regulation of Returns to Litigation Funders" (March 2021)

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"It's only a rebuttable presumption" - not an answer

1. LCM acknowledges that the Bill does not fix a guaranteed minimum return to class members, but rather introduces a rebuttable presumption that the scheme's distribution method is not fair and reasonable if more than 30% of the claim proceeds for the scheme are to be paid to parties other than its members.
2. LCM nevertheless highlights that when undertaking a commerciality analysis at the outset of a matter, reputable funders will not rely on the hope that the presumption will be rebutted. It is an additional risk in the claim and, unfortunately for claimants, it is a risk that, by its very nature, funders cannot price for.
3. Consequently, LCM submits that the framing of the guaranteed minimum as a rebuttable presumption does not alleviate the chilling effect that this aspect of the Bill will have on the availability of funding for smaller and mid-sized class action claims.

The reality of litigation

1. Finally, LCM submits that the Bill must also be considered in its broadest context.
2. It is trite to say that class actions are pieces of litigation, but this simple point is consistently overlooked. Class actions are large-scale complex litigation, and that litigation is adversarial, it is risky and it is expensive. LCM submits that it cannot be ignored that by participating in a class action, this is the process that class members are embarking upon. They are not simply applying for compensation through a scheme whereby the payment of such compensation is a certainty, far from it.
3. Litigation is inherently unpredictable - an action is commenced with imperfect information, progressed through an adversarial process and adjudicated by a member of the judiciary. The risk of a complete loss or an unsatisfactory outcome is an unfortunate aspect of litigation reality, and the cost of advancing a claim, particularly against a combative defendant, can have a very significant impact on an action's ultimate proceeds. This is true of both funded and unfunded proceedings, both commercial claims and class actions.
4. Never in the history of litigation have lawyers, barristers, experts, legislators or Courts guaranteed to any plaintiff that they will receive a particular minimum return from pursuing their claim. LCM submits that there is no clear basis for proposing to treat plaintiffs differently now, solely because they are in a funded class.

PART C: DEFINITION OF MANAGED INVESTMENT SCHEME

1. LCM has long supported fit-for-purpose, effective and meaningful regulation of the litigation funding industry.
2. Unfortunately, LCM submits that the Bill's deeming of class action litigation funding schemes to be managed investment schemes ("MIS") is a missed opportunity to offer the industry and, importantly, the claimants, a framework that actually assists them.
3. LCM submits that there are innumerable ways in which the MIS regime could be improved upon if it were to offer clear and relevant protections for claimants. LCM further submits that there are many considerations that tell strongly against the inclusion of a funded class action within the definition of an MIS.