Christian Porter (Pearce, Liberal Party, Attorney-General) Share this | Hansard source

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I move:

That the following matter be referred to the Parliamentary Joint Committee on Corporations and Financial Services for inquiry and report by 7 December 2020:

Whether the present level of regulation applying to Australia's growing class action industry is impacting fair and equitable outcomes for plaintiffs, with particular reference to the following:

(1) what evidence is available regarding the quantum of fees, costs and commissions earned by litigation funders and the treatment of that income;

(2) the impact of litigation funding on the damages and other compensation received by class members in class actions funded by litigation funders;

(3) the potential impact of proposals to allow contingency fees and whether this could lead to less financially viable outcomes for plaintiffs;

(4) the financial and organisational relationship between litigation funders and lawyers acting for plaintiffs in funded litigation and whether these relationships have the capacity to impact on plaintiff lawyers' duties to their clients;

(5) the Australian financial services regulatory regime and its application to litigation funding;

(6) the regulation and oversight of the litigation funding industry and litigation funding agreements;

(7) the application of common fund orders and similar arrangements in class actions;

(8) factors driving the increasing prevalence of class action proceedings in Australia;

(9) what evidence is becoming available with respect to the present and potential future impact of class actions on the Australian economy;

(10) the effect of unilateral legislative and regulatory changes to class action procedure and litigation funding;

(11) the consequences of allowing Australian lawyers to enter into contingency fee agreements or a court to make a costs order based on the percentage of any judgment or settlement;

(12) the potential impact of Australia's current class action industry on vulnerable Australian business already suffering the impacts of the COVID-19 pandemic;

(13) evidence of any other developments in Australia's rapidly evolving class action industry since the Australian Law Reform Commission's inquiry into class action proceedings and third-party litigation funders; and

(14) any matters related to these terms of reference.

Many times opposite members recently have spoken about the importance of parliamentary scrutiny, and we're about to find out how real that commitment to parliamentary scrutiny is. The shadow Attorney-General told us very recently that parliamentary scrutiny was fundamental to the health of our democracy, and of course one of the great engines of parliamentary scrutiny is the parliamentary committee systems. One of the great parliamentary committees is the Parliamentary Joint Committee on Corporations and Financial Services.

The subject of the scrutiny with respect to this motion is the class action litigation funding industry. This isn't a matter of marginal importance and a matter where there are slightly unusual or unorthodox practices going on that can be simply explained. The things that are happening in the class action industry with respect to litigation funding are actually quite remarkable, and those things require some high degree of scrutiny by this parliament.

First and foremost amongst those things that require a high degree of scrutiny are the absolutely jaw-dropping financial returns that are routinely being reported in the class action industry fuelled by litigation funding. Those returns are absolutely inexplicable in terms of normal returns on any sort of regularised or institutional investment instrument, and they are totally without any precedent in the Australian legal sector. It's the case right now that with great regularity this industry is demonstrating outcomes that cannot be said to be consistent with the interest of justice of the litigants whose interests are supposed to be represented by the actions in question. In fact, so remarkable are the happenings in the class action industry fuelled by litigation funding that it is unfathomable, I think, that any person who professes a commitment to parliamentary scrutiny could vote against holding a multiparty parliamentary inquiry by a respected joint standing committee into the class action industry fuelled by litigation funding.

In fact it seems that the central argument of the shadow Attorney-General appears to be that the parliamentary inquiry by the joint standing committee would be an attack on people seeking to access justice. Leaving aside that that is not, nor would it ever be, the purpose of seeking further and better understanding through parliament of the remarkable occurrences in this industry, we simply want the committee to consider whether the outcomes that we are routinely seeing in the class action litigation funding fuelled industry are in the interests of the people that are meant to be represented. Are the operation of the class action industry and its outcomes consistent with principles of justice, and are they in the best interests of individual litigants? They are the questions that we are seeking to get answers, with respect to, by virtue of this parliamentary committee.

There are three broad issues that require scrutiny here. The first is an undeniable fact, and that is that better scrutiny and understanding needs to attach to the utterly remarkable growth that has occurred in the class action industry in Australia. The class action industry in Australia is growing at an unprecedented rate. Federal Court data shows that the class action industry filings have increased by 325 per cent in the last decade. Other reports have indicated that class actions have tripled in the last seven years across Australia. So there are, firstly, real and unanswered questions arising as to why this is happening and why it is happening at such a rapid rate. What are the policy settings and what have been the changes that might be contributing to that phenomenal growth in the class action industry? And what is the link between that growth and litigation funding? Without more, that is a legitimate and compelling line of inquiry for this parliament and its committee.

The second real question then follows is whether Australia's class action framework is in its real world operation and in real world outcomes actually working for everyday Australians; and whether the class action industry fuelled by litigation funders is operating optimally? Is it operating in the best interests of the plaintiffs whose interests it is supposed to advance? On this question, it's critical to note that much of the growth appears to have been driven wholly or substantively by the prevalence of litigation funders in the class action industry. They now financially underwrite a massive amount of the class action industry in Australia. They essentially operate as equity investment vehicles where the majority of class action is fuelled.

Between 2008 and 2012, 40 per cent of finalised Federal Court class actions received third-party funding. Between 2017 and 2018, 77 per cent of class actions finalised in the Federal Court were backed by litigation funding. In fact a pivotal point of policy change that appears to have coincided with that rapid increase in the activity of litigation funders in the Australian system was that the previous Labor government made the decision to exempt all litigation funders from any form of meaningful regulatory oversight in 2013.

In 2009 the full Federal Court of Australia determined quite accurately that litigation funders were in fact offering a managed investment scheme. The consequences of that decision would have been that such schemes would have ordinarily and in normal circumstances quite properly attracted sensible regulatory oversight under Australia's Corporations Law but for that 2013 exemption. So it seems a legitimate thing to inquire into the link between that exemption as a policy document and the growth in litigation funding in the class action industry. In fact, we would say that to deny parliament the opportunity to better understand that linkage—and to what extent that 2013 decision has come to create the remarkable circumstances we have now seen exhibited in this industry—would not be in the best interests of the parliamentary scrutiny to which the opposition say they so dearly and closely adhere.

The third issue is perhaps the most remarkable feature of the class-action industry and the involvement of litigation funders, and that is that there are eye-wateringly high returns being received by litigation funders. In fact, those returns are at times absolutely staggering when considered in light of the investment that was initially put in. They raise real questions which this parliamentary committee can seek to answer; namely, whether the staggering returns for litigation funders are coming at the expense of plaintiffs. And there is just more and more undeniable evidence of the profits that are being returned to litigation funders that requires parliamentary scrutiny. It actually means that less money ends up with the mums and the dads and the ordinary Australians who might be plaintiffs in a class action. We cannot deny this parliament, through its committee, the opportunity to inquire into that remarkable feature of litigation funding in the class-action industry.

The Australian Law Reform Commission found that the median return to members of litigation-funding backed class actions was 51 per cent. When the litigation funders weren't involved, the median return was 85 per cent. So litigation funders get involved and the median return is much lower—the people who are actually the plaintiffs in these matters are worse off. There is a growing body of evidence that something about the operation of the system around litigation-funded class-actions is, effectively, transferring enormous amounts of money from the pockets of everyday Australians and providing huge returns to litigation funders. Why would we not inquire into that phenomenon?

In fact, just look at what the courts have said. Completely independent assessments by our completely independent Australian courts have been increasingly critical of these returns to litigation funders. In a settlement reached last year in the case of Tredrea v KPMG Financial Advisory Services—that's a telling example—the class action against KPMG concerned advice given to shareholders during a takeover. It was brought by Piper Alderman, funded by Litigation Capital Management, in the New South Wales Supreme Court. The judge questioned the legal bill and fee and said the funder's 30 per cent cut was arguably excessive—he described it as stratospheric—and provided a return of tens of thousands of per cent when compared to the funds that were actually expended in the case.

There are now just too many cases where the returns to plaintiffs would leave ordinary Australians just scratching their heads. Why would we not scrutinise this? In the Murray Goulburn case, the class action was brought by Slater and Gordon in the Federal Court against Murray Goulburn regarding financial forecasts. The judge said the funder's 32 per cent commission was 'not fair and reasonable'. The court eventually approved a 25 per cent commission. That 25 per cent commission netted a 390 per cent return to the litigation funders, which was explained in their own half-yearly results. So that was a decreased return that still provided a 390 per cent return on the invested capital. In the CIMIC case, approved in April last year, a foreign funder and Maurice Blackburn took approximately 60 per cent of the settlement, leaving their clients to fight over the remainder. Unbelievably, the funder in that case originally proposed a commission payment of double what they actually got.

In 2014, in Fitzgerald v CLBL Insurance, 300 former employees of Huon Corporation sued for unpaid workers' entitlements. They received absolutely nothing from the final settlement. The entire $5 million settlement went to lawyers, administrators and the litigation funders. So bad was the injustice in that case, it prompted the National Union of Workers to make a submission to the Victorian inquiry into litigation funding. The National Union of Workers said in their submission:

It is clear to us that some form of market regulation needs to occur to prevent this result from occurring again.

Because they got nothing—nothing. Why would we not have these questions asked and answered by a parliamentary committee? What possible reason could there be for not asking and answering those questions?

There's a matter recently where a settlement has been proposed around PFAS and Defence bases in Australia, a settlement which many members of this government have worked very hard to ensure occurs. The proposal is to take more than $50 million in commissions, and the lawyers propose to recap $30 million in fees—so an astonishing 40 per cent of the settlement would be swallowed up in legal fees and commissions, leaving the class members to fight over what is left. One class member in that proposed PFAS settlement said, 'We're looking at a pittance. But the funder has made a fortune.'

So what possible reason could there be for opposing this type of scrutiny? In the shadow Attorney-General's press release, he says:

Litigation funding and class actions provide a vital path to justice for ordinary Australians …

He then goes on in the next paragraph to say:

Just last November the Federal Court ruled in favour of the three lead applicants in a class action of more than 1,350 women who sued Johnson & Johnson … for negligence.

That's correct. Nothing in this parliamentary process of scrutiny proposes an end to class actions or litigation funding; we want to know why the returns to the litigation funders appear to be so excessive. But what is wrong with this example—and I'll read it again:

Litigation funding and class actions provide a vital path to justice for ordinary Australians …

And then the shadow Attorney-General gives his prime example of litigation funding and class actions providing a vital pathway to justice for ordinary Australians being the Federal Court ruling in the Johnson & Johnson matter. The only problem is: it wasn't a litigation-funded matter. Now, that does seem to be something of a weak argument as to why you wouldn't have parliamentary scrutiny into litigation funders—I don't know who at bar chambers was researching that, but it was poorly done.

This has to be looked into. One foreign funder is reported to have raised $100 million recently, with a substantial portion of that capital earmarked to be deployed inside our class-action system in Australia against vulnerable Australian businesses arising out of the COVID-19 pandemic. Can you believe that?

Another litigation funder has recently pointed out to shareholders that, during a previous pandemic—this is what it's boasting about—that litigation funder's company share price actually grew strongly, rising by 164 per cent during the SARS outbreak in 2003. So we have a massive amount of evidence of excessive returns because of litigation funders' explosive growth in funding class actions. We see the warning signs of that equity investment vehicle being used here to drive litigation arising out of the COVID-19 pandemic. We've got a government who simply want a parliamentary committee to look into, inquire and ask and answer questions on this issue, and we have an opposition that opposes that motion for parliamentary committee scrutiny. Let's hear why.

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