Litigation funders partly or wholly fund the costs of litigation in return for a portion of the proceeds if the action is successful.
A litigation funding scheme is generally an arrangement where a group of plaintiffs (the class action members), a law firm and a litigation funder collaborate to pursue a class action. Since a Federal Court case in 2009, this type of arrangement has been understood to constitute a managed investment scheme (MIS).
Until recently, the Corporations Regulations 2001 specified that:
- a person providing financial services for litigation funding schemes were exempt from the requirement to hold an AFS licence (if they maintain and apply adequate practices for managing conflicts of interest), and
- litigation funding schemes were exempt from being a MIS or a credit facility.
The changes do not apply to litigation funding schemes entered into before 22 August 2020. The exemptions that apply for litigation funding schemes involved in insolvency litigation and litigation funding arrangements that are used in actions involving a single plaintiff will remain.
Please continue to visit this page for more information and guidance for litigation funding as ASIC expects to update it from time to time.
Who must hold an AFS licence
You must hold an AFS licence to conduct a financial services business in Australia unless authorised to provide those services as a representative of another person who holds an AFS licence, or otherwise exempt.
A financial services business is a business of providing financial services. A person provides a financial service if they operate a registered managed investment scheme.
Subject to grandfathering provisions, you will need to have your AFS licence from the day you start your financial services business.
Apply for an AFS licence
You can apply for an AFS licence online using our eLicensing system, which individually tailors the application to your business.
Read these publications before submitting your AFS licence application:
- AFS Licensing Kit (Regulatory Guides 1 to 3), which provides an overview of the application process and information on supporting proof documents
- AFS Licensing: Organisational competence (RG 105), which provides guidance on the knowledge and experience we require of responsible managers, i.e. the people who are directly responsible for significant day-to-day decisions about the provision of financial services, and by reference to whom we assess your organisational competence.
- AFS Licensing: Financial requirements (RG 166), which assists with determining the level of capital ASIC requires depending on the financial service you intend to provide
- Litigation schemes and proof of debt schemes: Managing conflicts of interest (RG 248), which explains how a person who provides a financial service can satisfy the obligation to maintain adequate practices and follow procedures for managing potential and actual conflicts of interest in relation to a litigation scheme or a proof of debt scheme.
You should also read:
- Information Sheet 240, which outlines the additional information required by ASIC to assess a range of persons under a ‘fit and proper person test’ set out in section 913BA of the Corporations Act.
- ASIC Pro Forma 209, which sets out the standard licence conditions.
Frequently Asked Questions
1. What organisational competence will responsible managers need to demonstrate regarding Litigation Funding Schemes?
a. For most authorisations relating to litigation funding schemes, ASIC will apply its standard approach to assessing organisational competence, as outlined in Regulatory Guide 105 AFS Licensing: Organisational competence (RG 105).
b. For Responsible Entities (REs) that operate registered managed investment schemes (MIS) – litigation funding schemes – we will consider an applicant without a responsible manager (RM) with previous retail managed investment scheme experience, provided they have nominated an RM that has operated an exempted litigation funding scheme involving retail clients and an RM with litigation experience and have engaged a law firm to assist them with their financial services retail client conduct and disclosure obligations.
2. Will advisers be required to comply with Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) to provide advice to retail clients in relation to litigation funding schemes?
Yes – all natural persons who provide financial product advice to retail clients must meet the training standards unless they fall within one of the exemptions (see RG 146.18–RG 146.29). As litigation funding schemes are no longer exempted from being an MIS, all persons who provide financial product advice to retail clients must meet the training standards in relation to MIS.
Note: Schemes entered into prior to 22 August 2020 remain exempted from being classified as an MIS. Persons advising on the exempted schemes are not required to be RG 146 compliant.
3. What obligations do litigation funders have to manage conflicts of interest?
ASIC’s Regulatory Guide 248 Litigation schemes and proof of debt schemes: Managing conflicts of interest (RG 248) explains how a person who provides a financial service can satisfy the obligation to maintain adequate practices and follow procedures for managing potential and actual conflicts of interest in relation to a litigation funding scheme or a proof of debt scheme.
Note: These requirements also continue to apply to exempted litigation funding schemes entered into prior to 22 August 2020.
4. What authorisations will be required for a litigation funding scheme? Why can’t I select 'litigation funding' when submitting a Form FS01 Application for an AFS licence or a Form FS03 Variation to an AFS licence?
As a result of amendments to the Corporations Regulations 2001, litigation funding schemes entered into after 22 August 2020 are an MIS. ASIC requires any person who carries on a business of providing financial services in relation to litigation funding schemes to hold an Australian financial services (AFS) licence. The AFS licence authorisation required will depend on the activities of the financial service/product provider.
For example, a litigation funding scheme provider may require authorisations to:
- provide general advice to retail or wholesale clients in relation to MIS (litigation funding schemes);
- deal by Issuing interests in an MIS;
- deal by applying for, acquiring, varying or disposing of interests in MIS
- operate a registered MIS – litigation funding scheme; and
- depending on the particular circumstances, provide custodial or depository services.
Applicants for AFS licences will need to consider which authorisations are appropriate for their particular circumstances and, where necessary, seek their own professional advice.
Note: The FS01 and FS03 forms have not been altered to include 'litigation funding scheme' as a financial product class for any authorisations. Please highlight in the A5 Business Description core proof that you are requesting litigation funding authorisations. The AFS licence authorisations will be tailored as required by the ASIC Licensing Team
5. Are there any additional Licensing requirements for REs of registered MIS that are “litigation funding schemes”?
a. To hold an AFS licence authorised to 'operate a registered managed investment scheme', an RE must be a public company.
b. An RE must hold adequate professional indemnity insurance (see RG 126)
c. An RE must hold at least $150,000 Net Tangible Assets (see RG 166);
d. ASIC expects that the RE will nominate Responsible Managers that collectively demonstrate both the “operate scheme” and “assets under management” elements of the Organisational Competence standards articulated in RG 105 (RG 105.40);
e. An application for an AFS licence seeking the authorisation to 'operate a registered managed investment scheme' as an RE will attract a 'high complexity' application fee (see Fees for commonly lodged documents);
f. An RE will be subject to the annual ASIC Industry Funding Model Cost Recovery Levy.
g. An RE will have to be a member of the Australian Financial Complaints Authority (AFCA) scheme.
6. What financial requirements will apply to litigation funders?
ASIC’s licensing financial requirements are outlined in Regulatory Guide 166 Licensing: Financial requirements (RG 166). These requirements apply to REs of registered MIS that are litigation funding schemes without variation.
Generally, a managed investment scheme (MIS) must be registered if it has more than 20 members or is promoted by a person who is in the business of promoting MISs. Some MISs may be exempt from registration, for example wholesale schemes.
To register a MIS, the proposed responsible entity must be a public company and hold an AFS licence with authorisations to operate the MIS.
Your application to register a MIS must:
- contain details of the MIS, proposed responsible entity and auditor of the compliance plan; and
- be accompanied by a copy of the constitution, compliance plan and a statement signed by the directors that the constitution meets the requirements of s601GA and s601GB and compliance plan meets s601HA of the Corporations Act.
Find out more on how to register a managed investment scheme.
A registered MIS must have a legally enforceable constitution between the members and the responsible entity. The constitution must make adequate provision for, or specify certain prescribed matters, including:
- consideration to be paid to acquire an interest in the MIS;
- powers of a responsible entity to invest or deal with the scheme property and borrowing powers (if any);
- the responsible entity’s rights (if any) to be paid fees or indemnified out of scheme property;
- dealing with complaints;
- any rights of members to withdraw from the MIS and adequate withdrawal procedures; and
- process for winding up.
A registered MIS must have a compliance plan that sets out adequate measures to ensure that the responsible entity complies with the Corporations Act and the constitution of the MIS.
You should have arrangements in place to ensure that:
- all scheme property is clearly identified and held separately from the property of the responsible entity and any other scheme;
- the compliance committee (if one is required) functions properly;
- scheme property is valued at regular intervals appropriate to the nature of the property;
- the compliance plan is audited; and
- adequate records of the MIS operations are kept.
Obligations as an operator of a registered MIS
As an operator of a registered MIS, you have a range of obligations under the Corporations Act. These include but are not limited to:
- holding an AFS licence to operate a registered MIS as the responsible entity.
- meeting financial requirements, namely solvency and net assets, cash needs and audit requirements.
- providing upfront product disclosure i.e. providing Product Disclosure Statements.
- acting in the best interests of members and giving priority to members’ interests if there is a conflict.
- adequately managing conflicts of interest.
- meeting internal and external dispute resolution requirements.
- meeting professional indemnity insurance requirements.
On 4 August 2020, ASIC held a roundtable on litigation funding for industry.
For more information on registered MISs, please refer to the following regulatory guides:
- Funds management: Establishing and registering a fund (RG 131) provides guidance on the requirements to establish and register an MIS.
- Funds management: Compliance and oversight (RG 132) provides guidance on the compliance and oversight obligations that certain entities (such as responsible entities) must meet under the Corporations Act.
- Funds management: Constitutions (RG 134) outlines the requirements in the Corporations Act for the constitutions of registered schemes.