Litigation funders will be regulated under the Corporations Act and required to hold an Australian financial services licence, Treasurer Josh Frydenberg announced today.
The Treasurer said the government wants litigation funders to be subject to greater regulatory oversight.
"Litigation funders are currently exempt from holding an AFSL and being categorised as a managed investment scheme," Frydenberg said.
"As a result, litigation funders do not face the same regulatory scrutiny and accountability as other financial services and products under the Corporations Act."
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By bringing litigation funders under the Corporations Act, they will be required to obtain an AFSL from ASIC.
With an AFSL comes obligations around fairness, honesty, competence and organisational resources.
"Removal of these exemptions will also require greater transparency around the operations of litigation funders in Australia," Frydenberg said.
The amendments are expected to take effect in three months.
Australia's largest litigation funder, the merged Omni Bridgeway and IMF Bentham supported the call for regulation last week as the parliamentary joint committee inquiry into class actions and litigation funding got underway.
"As the pioneer of litigation funding in Australia, Omni Bridgeway is a supporter of additional regulation that would improve the class action system," the company said.
The litigation funder said it supported a licensing regime that would include capital adequacy requirements, disclosure obligations and reporting standards.
Omni Bridgeway also said it supports a minimum return to group members in a class action of no less than 50% of the proceeds from the action.
In announcing the inquiry into litigation funders and class actions, Attorney General Christian Porter said he was concerned that a boom in the litigation funding industry was not corresponding in better outcomes for people involved in class action lawsuits.
"In many cases, funders are taking up to 30% of legal settlements, leaving the members of the action to fight over the scraps that remain once legal fees and other costs are paid," Porter said.