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Class actions and the regulation of litigation funders

The funding of class actions has come under recent scrutiny in Australia. The Australian government published the Corporations Amendment (Litigation Funding) Regulations 2020 on 23 July 2020. These require litigation funders to be licensed, and to comply with invested funds regulations. It is understood to be the case that these changes have been implemented due to a surge in shareholder class actions.

Class actions provide a fair and efficient mechanism for the courts to resolve disputes with a common set of issues. However, these actions are invariably complex, notoriously expensive and take years to resolve. They are usually brought against well-funded defendants and as such these sorts of actions have, historically, been difficult to pursue due to the lack of funds.

Litigation funding has stepped in to fill this void. The funder pays the claimant’s costs on a non-recourse basis – that is, if the case is lost, the funder is owed nothing. The funder is only reimbursed its costs and receives a fee if the case is successful. The funder may also indemnify the litigant for any adverse costs. Litigation funding also provides protection to defendants who know their costs will be paid in the event the action is unsuccessful.

If any class actions are found to be unmeritorious (and funded actions rarely are given that funders only receive a return in the event of success), the Court acts as a safeguard by denying the claim and ensuring that a defendant is suitably protected and compensated in respect of the costs it may incur in defending such a claim. The Courts can also make cost orders against funders, or reduce the amount of commission if necessary.

How the new regulation in Australia will work in practice is being watched closely by the rest of the litigation funding world. The timing of which was not lost on the Scottish market, when only 8 days later, class actions - or group proceedings as they are officially known - were made available for the first time. Part 4 of the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 introduced the concept and detailed rules came into force on 31 July 2020.

Litigation funders in the UK do not currently operate in a regulated market. Since its inception in 2012, Restitution, like many of our other fellow reputable funders are self- regulated. We operate under a strict code of conduct for our entire business and we adhere to the highest of standards. These standards include only funding meritous claims, ensuring we have capital adequacy, checking and maintaining under constant review any potential conflicts of interest - in particular ensuring that we avoid (and deal with) any conflicts between the interests of us as funder, the lawyers and the claimants. We also will clearly set out the specific, limited circumstances in which we may be permitted to withdraw from a case and outlines the way in which the roles of each involved party should be kept separate.

Whilst we will continue to monitor the position in Australia and will provide further updates on how the regulation of funders is working in practice, we believe that the systems and standards that we have in place ensure that we are already meeting the highest possible standards to protect and assist our clients.

Restitution welcome the approval of class actions in Scotland, we are very hopeful that will result in mass claimants having increased access to justice, and with them additional funding options.

September 2020