In May 2018, the Australian Law Reform Commission (ALRC) released a discussion paper on class action proceedings and third-party litigation funders that proposes, among other things, the regulation and licensing of litigation finance providers.
In July, Burford submitted our response to the discussion paper, which can be found here.
In a recent presentation on responses to its discussion paper, the ALRC noted that its proposal has received broad but varied support, and that Burford is among several respondents—including the Victorian Bar Association and Australian Shareholders Association—to oppose the proposed licensing reform in the form suggested in the discussion paper. From Burford’s perspective, a blanket licensing proposal for all litigation finance providers is potentially problematic in two significant ways: (1) It fails to differentiate between types of financing arrangements; and (2) It is an overly drastic response to the perceived problem. Such an indiscriminate approach risks obstructing access to capital for those who need it.
It is also worth noting that, to date, no country has created a licensing regime for litigation funders. In both the UK and the US, two other examples of jurisdictions in which third-party litigation funding has been available for well over a decade, legal finance providers operate at high professional standards.
We are encouraged that the ALRC’s thinking on this issue has apparently modified post-submission, in suggesting an approach based on narrowing the current AFSL exemption rather than establishing a bespoke license regime for litigation funders. Specifically, ALRC suggests that the AFSL be required for litigation funding of class actions, but only where claimants are consumers. It is important to recognize that not all litigation finance is used in the context of class actions. In fact, the financing of class actions represents only a tiny fraction of Burford’s business globally.
As an alternative to mandated licensing, we believe Australia should instead follow the model of the UK, where litigation funders self-regulate through an industry association, The Association of Litigation Funders of England and Wales (ALF), of which Burford is a founding member. ALF provides a voluntary code for funders that generally tracks the licensing requirements suggested by the ALRC. The voluntary code has worked exceptionally well in the UK. Among other requirements, the code calls on its members to satisfy a capital adequacy clause:
“The Code requires funders to maintain adequate financial resources at all times in order to meet their obligations to fund all of the disputes they have agreed to fund, and to cover aggregate funding liabilities under all of their funding agreements for a minimum period of 36 months”
Such an approach could be one alternative to other solvency and audit requirements as suggested by the ALRC’s report although we continue to believe audit requirements are very important. Burford noted in its submission that it is difficult to establish a net asset position given the unique business model of litigation funders; the businesses are complex and there are different ways of valuing assets.
Although we remain sensitive to the considerations that have led to the proposal of licensing in Australia, our belief is that the ALRC’s recommendations should, by design, not jeopardize the supply of capital for commercial users of litigation finance and should allow the most professional, effective and efficient financing of legal services to emerge. It is for this reason that we do not believe that a licensing regime, even in the context of class actions, is necessary—we believe the vast majority of litigation finance providers in Australia and elsewhere in the world have served clients professionally without them.