Can class action reform be expected from the new Labor Government - not a question of "if", but "when"?

In opposition, Labor described the Coalition Government's approach to class actions and litigation funding reform "an embarrassing shambles", reflecting how politicised the issue has become. Now that Labor holds the seat of power, should we expect reforms to the Federal class actions regime? And if so, what might that reform look like?

The possible class action and litigation funding reform framework

There have been two recent inquiries into the Federal class action regime. The first was in 2018 by the Australian Law Reform Commission (ALRC) and considered whether, and to what extent, class action proceedings and third-party litigation funders should be the subject of Commonwealth regulation to ensure the integrity of third-party funded class actions and the efficacy of the class action system. The ALRC published a report in 2019 which contained 24 recommendations which were not acted on by the Coalition Government.

The second was in 2019 by the Parliamentary Joint Committee on Corporations and Financial Services and considered whether the regulation of the Federal class action regime was impacting fair and equitable outcomes for plaintiffs and promoting efficient and effective uses of court resources. The Parliamentary Committee published a report in 2020 which contained 31 recommendations, some of which overlapped with the ALRC's recommendations.  

The Labor minority members of the Parliamentary Committee were critical of some of the recommendations made by the Liberal majority members, and of the Coalition Government's approach to class actions and litigation funding reform more generally. A key criticism was that the Coalition Government had not acted on the ALRC's recommendations.  

Now that there has been a change in Government, we believe that the Labor Government will put class action and litigation funding reform back on the agenda, including by revisiting the ALRC report. We believe the following areas will be considered ripe for reform.

Continuous disclosure laws

In May 2020, the Morrison Government temporarily amended the Corporations Act so that company directors and officers will only be liable if there has been knowledge, recklessness or negligence with respect to updates on price sensitive information to the market.

The changes were made, in part, in response to the heightened level of uncertainty around companies’ future prospects as a result of the COVID-19 pandemic and the resulting threat of opportunistic class actions. The changes meant that it was less likely that directors and officers would fall foul of their continuous disclosure obligations if their forecasts were later found to be inaccurate. 

In its report, the Parliamentary Committee recommended that the temporary changes be made permanent. The Labor minority members opposed the recommendation, saying that "Australia's continuous disclosure regime is important" and said that the "Committee should not recommend permanent changes to ‘a fundamental tenet of our markets’ in the absence of a proper process of review, deliberation and debate". 

Notwithstanding this opposition, the Morrison Government made the temporary changes permanent in August 2021.

Given the stance of the Labor minority members, it would not be surprising for continuous disclosure laws to be a focus for the new Government.

Regulation of litigation funders

Prior to August 2020, litigation funders were exempt from holding an Australian Financial Services Licence (AFSL) and being categorised as a managed investment scheme (MIS). The exemption was established by an earlier Labor Government.

In May 2020, the Coalition Government announced that it was removing the exemption, effective August 2020. This meant that litigation funders would need to hold an AFSL and that funded class actions would become subject to MIS rules.

The Coalition Government said that the changes ensured that litigation funders face the same regulatory scrutiny and accountability as other financial services and products under the Corporations Act. Labor were critical of the changes, saying that a regime based upon managed investment scheme rules was not an appropriate structure to regulate litigation funders. They also said it was likely to lead to increased costs for plaintiffs and restricts access to justice.

The issue was subsequently considered by the Parliamentary Committee who recommended that the Government legislate a special MIS regime specifically tailored for litigation funders however this was not acted on by the Coalition Government. 

Given their concerns, it is likely that the Labor Government will reconsider whether the current regime is the most appropriate way to regulate litigation funders or whether a bespoke regulatory regime should be established.

Minimum returns to class action group members

The Coalition Government introduced the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021 which included a rebuttable presumption that group members recover a minimum of 70% of any class action settlement or judgment. In practice, this would also have the effect of restricting the returns to litigation funders to a maximum of 30% and therefore preventing litigation funders from taking disproportionate fees in the process.

At the time it was introduced, Labor, as well as a number of members of the legal profession, expressed concerns regarding the proposal and ultimately the Coalition Government put the Bill on hiatus. Given the change in Government, it is highly unlikely that the proposal will be reinvigorated.

Incentives for funding class actions  

A contentious issue in class action and litigation funding reform is how litigation funders should be rewarded for taking on the risk of financing a class action. The ALRC report considered the issue and made recommendations which are likely to be attractive to the Labor Government.

One such recommendation is to give the Federal Court express power to make common fund orders (which enable litigation funders to take a percentage-based commission from any class action settlement or judgment). At present there is uncertainty about the scope of the Court's powers to compensate litigation funders for the risk they take on in financing class actions.

Another option that might be appealing to the Labor Government is to remove the prohibition on solicitors entering into a "percentage-based fee agreements" (also known as a "contingency fee"). The prohibition was recently removed in Victoria, and proponents say that this has expanded the availability of funding class actions that litigation funders would say are financially unviable and have therefore increased access to justice.

Given the relationship between incentives, the viability of bringing class actions and group member returns, we expect that reform relating to the incentives structures for those financially backing class actions is likely to be of high interest to the Labor Government.

What happens next?

Given the length of time since Labor has been in power, and breadth of class actions jurisprudence which has been made in that time, and concerns expressed by Labor about the reform agenda which was adopted by the Coalition Government, we expect the next 12-24 months to be an interesting time in the class action reform space.