Australia considers capping class action funders' fees

SYDNEY, May 28 (Reuters) - Australia is considering capping fees for litigation funders and lawyers, and guaranteeing a minimum rate of return for plaintiffs, in its latest clamp down on the industry following a surge in costly class action lawsuits.

Australia’s government last year moved to tighten regulatory scrutiny of wealthy offshore and local litigation funders following a surge in successful class actions against companies in recent years.

Litigation funders invest in lawsuits by funding them in exchange for a share of any settlement or judgment. If the group of plaintiffs lose, it does not have to repay the financial investor.

Companies such as Omni Bridgeway Ltd, formerly IMF Bentham, and Maurice Blackburn, have funded more than 300 class action suits in Australia, including against the country’s major banks.

A parliamentary report headed by a governing Liberal party senator in December said Australia’s light touch regulatory regime had created a global hot-spot for investors based in tax havens and with “dubious corporate histories” generating huge returns, “in some cases of more than 500 percent”.

It suggested 70% of the gross proceeds could be a minimum return for class action members.

“This measure is of particular importance to ensure successful applicants are adequately compensated in their cases as well as preventing litigation funders and law firms from taking disproportionate fees in the process,” Treasurer Josh Frydenberg said in a joint statement with the nation’s Attorney-General.

Litigation funders, however, say such a limit would be prohibitive for smaller cases given the high risk nature and costs involved in backing such lawsuits.

Last year, the government introduced a licencing requirement for litigation funders, which were previously categorised as managed investment schemes and did not need a financial services provider licence.

It has also proposed legislation to permanently lower the bar on listed companies’ so-called “continuous disclosure” obligations, protecting companies and their officers against liabilities for misleading or and deceptive conduct unless “fault” can be proven.

The government will consult on the proposed minimum rate of return guarantees before making a final decision this year, the statement said.

Reporting by Paulina Duran in Sydney; Editing by Michael Perry