The Entitled Class

Submission to the Parliamentary Joint Committee on Corporations and Financial Services by James Mathias

I thank Senators and Members for the opportunity to appear before this inquiry today, and let me say from the outset that I, like you, believe in class actions as an efficient and effective vehicle to bring justice to a class of Australians who have been wronged.

That said, this is an area of our justice system that clearly shows a need to be reformed in a way that protects and enshrines class actions as a vehicle for justice to be achieved.

The MRC’s submission to this committee has demonstrated a growing scourge of Australian class actions being used, not for justice, but for a small group of vested interests to make extraordinary profits for themselves and their shareholders.

It is a group within the economy that is currently booming. It is a sector which generates almost no positive effect on gross domestic product (GDP). It does almost no research and development, manufactures no products and employs very few people.

The super profits of this sector occur at the expense of Australian businesses, the Australian economy and the Australian people who rightly deserve compensation. This seemingly unstoppable sector is, the litigation financing industry.

The landscape we find ourselves in today, bears little resemblance to the framework that established class actions in 1992. No one then could have seen the advent of the litigation financing industry. Let alone contingency fee arrangements or the concerning invention of a common fund order.

These three factors I might add fly in the face of access to justice. They instead serve the purpose of access to profits.

It is worth digging a little deeper into exactly what these profits are, how they are made and specifically, if these super profits being made by litigation funders are having an effect on the damages awarded to the very victims they are meant to be supporting.

As our submission details, the super profits of litigation funders are 17 times larger than those that might be achieved by investing in ASX 200 shares and nearly 12 times the benchmark returns earned by US hedge funds.

Ordinarily we at the Menzies Research Centre (a free market think-tank) are not against profits. However, we are concerned about, at whose expense these profits are being made at. We believe it is a shame that through our current system these vulnerable Australians are not only victimized at the cause of their class action but also when vindicated.

Australia is fast approaching a situation where our legal structure mimics the litigious nature of the U.S. In fact, Australia is now seen as the second most desirable destination to invest in civil class actions. Class members are now second best to the profits of those backing them for financial gain.

It is clear that litigation funders take an ever-increasing cut of these awards. Analysis in our submission saw the commission taken by litigation funders rising from 15% in 2016 to 24% 2019. A 160% increase over 3 years.

Simultaneously, the share of settlement proceeds distributed to claimants has fallen from 59% to 39%, a minority share. In practical effect, the damages awarded to victims, intended to remedy their victimisation is significantly diminished.

In actions run without a litigation funder, members should expect to receive around 85 per cent of the damages awarded to them.

All the while, these profits are made by companies exempted by then Labor Minister, Chris Bowen in 2013 from the meaningful regulatory oversight that you would expect of a company that is essentially offering a managed financial product.

The Then-Minister Bowen's exemption caused the industry to proliferate with class actions numbers skyrocketing in the years following.

59 class actions were commenced in FY19. This represents a record high. Our analysis of class action fillings and trends predicts will be matched or beaten in 2020.

It is claimed that the need for these high returns is as a product of the risk they take on. However, with a case success rate of between 87% and 94% we believe this rationale is dubious and dishonest at best. As rarely do such investments carry such a relatively high degree of certainty.

A further interesting development is that this class action growth is driven primarily by claims by shareholders which have increased by 1,237% and claims by investors by 355% over the last decade.

The advent of the litigation industry has seen many funders flock to this market, many of them foreign and who though tax treaties, complicated structures and dubious accounting pay no or little tax here in Australia.

As the system is further bent in the pursuit of profits, there are now very real risks that a class action could be run in your name, without your knowledge or consent. A misdeed compounded by the fact that the funder will likely receive a commission of any damages awarded to you.

Take for example, the Takarta airbag’s in BMWs case. In this case only 33 of the potential 200,000 class members had entered into a litigation funding agreement and agreed to the funder’s terms.

The advent of contingency fees is further proof of plaintiff lawyers seeking to put their hands in the commission basket. Contingency fees fly in the face of the 200-year-old prohibition that lawyers be only able to charge a fair and reasonable fee for their service.

They instead distort the fiduciary and client protection provisions they are bound to owe in their pursuit for more money.

Let us be very clear, this is unacceptable. To be in a class action in this country there must first be a requirement that you consent to it, after all how can you opt out of a class action that you don’t even know is being run.

The Australian class action system has been highjacked to serve a small group of vested interests and their quest for extraordinary profits. Reform is needed before this gets out of hand. The emphasis must be returned back to the interests of the class members and not their benefactors.