28 May 2020

We have allowed a sophisticated class action industry to grow without bespoke regulation

Jason Betts welcomes the Australian parliamentary review into class actions and calls for town hall-style public debates

Jason Betts

Jason Betts: 'We have not yet evaluated whether the rapid growth in class actions is actually good for our economy'

The parliamentary committee inquiry into all aspects of the class action system, which was announced on 13 May, is an important review with the potential for lasting impact on the Australian class action landscape.

The Australian government recognises that it is time to take a fresh look at the efficacy of our class action system, in particular the enormous amount of funds that class actions transfer from Australian companies to litigation funders and law firms. 

While a number of reviews have occurred to date, the Australian class action market is in a state of enormous flux and as a country we have not yet evaluated whether the rapid growth in class actions is actually good for our economy and fairly balanced against access to justice concerns. 

Instead, under the rubric of access to justice, we’ve allowed a sophisticated class action industry to grow without bespoke regulation, invited American-style contingency fees for plaintiffs in some jurisdictions, and created the world’s leading class action funding market with consequential pressure on the Australian business and insurance sectors. 

The parliamentary inquiry’s wide mandate will place these critical class action issues firmly on the agenda.

Contingency fees

Another critical issue to be picked up in the review relates to whether Australia should embrace contingency fees. There is limited justification for contingency fees on access to justice grounds. Where is the evidence in Australia that contingency fees will cause lawyers to pursue unexplored types of class action that aren’t already aggressively considered by Australia’s growing litigation funding market? 

Funders can already charge contingency fees –— and experience shows that corporate misconduct and continuous disclosure claims are generally pursued by the funding industry. We already have enough class action activity in that space. 

Access to justice is most needed for uneconomic claims presently overlooked by third-party funders with low potential damages on behalf of vulnerable sections of our society. It is doubtful that the financial incentives of contingency fees will attract lawyers to these claims. 

It will also be important for this review to examine whether Australia’s continuous disclosure laws have morphed too far into a launching pad for class action litigation rather that a true tool for the maintenance of an informed market, and to scrutinise what proportion of class action settlement funds go to plaintiffs law firms and funders, as opposed to group members.

Open debate

It is critical that this review involves more than just lawyers. It should reach out to take positions from the widest set of stakeholders possible, including the general public, consumer groups, including shareholder associations, businesses of all sizes, the insurance profession, the funding industry, and, critically, directors and executives of major Australian corporates who bear a significant burden through the growth of class actions. 

Within the shareholder community, a range of retail and institutional shareholders should be engaged. I also believe something else is needed, in addition to written submissions, and indeed, should be encouraged — discussion. That should include town hall-style debates and feedback sessions involving all sides, which I feel are useful to lift the level of public discourse on this subject.

This should not be a debate between lawyers and politicians, but rather be as holistic as possible and address the one central question of importance: “Is our class action procedure serving its intended purpose”?

Jason Betts is an Australian disputes partner specialising in class action litigation at Herbert Smith Freehills

Further reading

Regulatory net tightens over litigation funders as Australian parliament launches class action inquiry — Defendant lawyers and business lobby celebrate after double assault on 'booming' class action industry

The multimillion-dollar settlement with a sting in its tail for Australia class actions — The Vocus judgment will have a chilling effect on litigation funding hindering access to justice, argues Steven Friel