A Lesson from Australia

As in the United States, litigation financing has been playing a growing role in Australia.  Originally employed to facilitate litigation in insolvency proceedings, third-party litigation financing has expanded to other areas of law, including complex torts, class actions, and high-stakes commercial litigation.  Prompted by concerns about the potential problems from unregulated litigation financing, commentators have proposed an oversight regime for Australia, which could also be a guide for those thinking about regulating third-party litigation finance in the United States.  See Nick Mavrakis, Matthew Daley, & Stuart Clark, An Oversight Regime for Litigation Funding in Australia.

In Australia, the government has taken little action to provide any kind of oversight regime for litigation financing.  Entities that provide litigation financing are exempt from Australia’s licensing rules for financial services providers.  Moreover, those financing entities are not bound by the professional rules or fiduciary duties that apply to lawyers in their dealings with clients.

There are substantial risks from this absence of regulatory control.  Without licensing requirements, there is a chance that both lawyers and parties to litigation could be victimized by litigation funders who lack the resources to meet their promises about paying for litigation costs.  In addition, there are no rules requiring disclosure of key information to the parties who seek funding.  Another problem could arise if litigation funders are permitted to have extensive control over strategic decisions about the litigation.  Such control could lead to conflicts of interest between the litigation funders, the lawyer and the claimant.

In An Oversight Regime for Litigation Funding in Australia, the authors propose refroms to bring litigation funders under the same kind of regulatory oversight that governs other providers of financial services. For one thing, they recommend that litigation funders should be licensed like other providers of financial services.  Moreover, they suggest that there should be specific licensing requirements that apply to litigation funders, such as capital adequacy requirements, disclosure rules, and breach reporting.  Second, they propose that this licensing regime should be administered by Australia’s securities regulators, the Australian Securities and Investment Commission.

Although Australian law includes some obvious and significant differences with American law, the proposed reforms provide a starting place for thinking about how to effectively regulate litigation funding in the United States.  Because litigation funding involves providing a complex financial services product, it should be subject to the same kind of regulation as other financial services products.  That is, there should be limitations on who can provide litigation funding to assure that neither parties nor their lawyers are victimized by inadequately capitalized entities.  And there should be disclosure requirements for the fundamental elements of the transaction, so that the parties relying on the funding understand what they are getting into.  Having a basic regulatory system in place, either at the state or federal level will create a fairer and more stable market for litigation funding, which will benefit funders and parties alike.

Works Cited

See Nick Mavrakis, Matthew Daley, & Stuart Clark, An Oversight Regime for Litigation Funding in Australia (August 2014) (available at http://www.instituteforlegalreform.com/uploads/sites/1/LitinAUS.pdf).

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