Why litigation funding is big business
a lack of regulatory oversight has enabled litigation funders to generate massive returns at the expense of victims in class actions. by james mathias.
While it often escapes attention, the Litigation Funding industry is an Australian innovation that has delivered extraordinary profits to investors. It has grown to be one of the most profitable asset classes in the world, as highlighted this week in the Australian Financial Review.
But in practice, these profits come at the expense of the victims in many complex cases.
While the public understand the need for class-actions they know little of the industry that seeks to profit from these complex cases. The Litigation Funding industry sees investors financing class-action lawsuits in return for a commission on the outcome. It is now a big business in Australia, and it’s getting bigger.
Open Lawfare, the latest report from the Menzies Research Centre shows Australia’s Litigation Funding industry has quadrupled in size over the last 10 years, with industry revenue reaching an estimated $200 million this year.
In the last five years alone, the Litigation Funding industry has recorded a compound annual growth rate of 9.6%, far outstripping industries like Finance (0.7 per cent), Management Consulting (1.9 per cent), Mining (2.0 per cent), and Legal Services (2.6 per cent).
There is a clear structural incentive for litigation funders to invest in Australian class-actions. Our Government has exempted the industry from meaningful oversight. In Australia, we hold litigation funders to a lower standard than other firms providing financial assistance to customers. These incentives have helped the industry grow and have the potential to overshadow the legitimate rights of class members to access justice.
According to King & Wood Mallesons, 53 class-actions were filed in Australian courts last year, with over $1 billion in settlements reached in the same timeframe. This makes us the second biggest forum for class action litigation globally behind the US.
ASX 200 companies have a one in 10 chance of having a class-action launched against them.
When a system whose primary purpose is to compensate claimants that have been wronged is hijacked for profit motives we must consider changing the framework that has allowed it to prosper. Yet many suggest this growth is a good thing; that more class actions and more investors willing to fund them means greater access to justice for ordinary Australians who’ve been wronged.
This is the narrative pushed by the Albanese Government, who, in one of their first acts after coming to power in May 2022, rolled back Coalition reforms that ensured litigation funders had proper regulatory oversight and that claimants got their fair share of class action settlements. It’s also what you’ll hear from firms like Maurice Blackburn and Slater and Gordon – themselves ALP donors – who stand to benefit most from this roll back.
Our research tells a very different story: the biggest winners from the explosion of class action litigation in this country are often the wealthy funders.
Between 2009 and 2020, 41 class actions backed by litigation funders were settled in Australia, generating a total settlement sum of $2.389 billion. Of this, the lawyers made $341.84 million and litigation funders received a whopping $642.63 million. That’s almost a billion dollars wiped off the total settlement sum.
One of Australia’s biggest litigation funders, Omni Bridgeway, has achieved a three-year investment Internal Rate of Return (IRR) of 102 per cent funding Australian class actions. Another large funder in Australia, Litigation Capital Management has a portfolio IRR of 78 per cent and CASL who are raising another $150 million on top of the $156 million already raised for Australian actions is touting returns of 165 per cent from two lawsuits it has already backed.
It is no wonder other firms are seeking to capitalise. The Australian Financial Review reported on the recent arrival of London-headquartered class-action firm Pogust Goodhead, backed by a billion dollar war chest from American hedge fund Gramercy, boasting an ambition to launch 10 class actions in the next 12 months. In 2020 it was estimated that there were 22 litigation funders operating in Australia but only six were Australian owned or based.
What’s also clear from our research is that funders’ profits can come at the expense of claimants’ payouts. Statistics from the Australian Law Reform Commission show that for class actions settled between 2013 and 2018, those underwritten by third-party litigation funders returned a median of 51 per cent of the settlement to claimants, compared to 85 per cent in actions taken without third-party litigation funders.
That’s why we’ve made a suite of recommendations for reforming Australia’s class-action regime to ensure claimants get a fair go. Recommendations include capping lawyer and litigation funder fees at 30 per cent, allowing courts to appoint contradictors to uphold claimants’ rights, and strengthening disclosure requirements so prospective claimants can better understand what actions look like before they sign on.
Adopting these measures to fix the system should be the next step for politicians and policymakers, but this can’t happen without a return to first principles when it comes to class-actions.
Our courts exist to right wrongs and give ordinary people access to justice, not to let financiers make a quick buck off the misfortune of others.
James Mathias is the Deputy Executive Director of the Menzies Research Centre and Lead Author of a new MRC Report, Open Lawfare: How Australia became the lawfare capital of the world.
