Litigation funding schemes

Litigation funders partly or wholly fund the costs of litigation in return for a portion of the proceeds if the action is successful.

Regulation of litigation funding schemes

Operators of litigation funding schemes will generally need to hold an AFS licence and each litigation funding scheme will need to be registered as a managed investment scheme see: Corporations Amendment (Litigation Funding) Regulations 2020.

The current requirements do not apply to litigation funding schemes entered into before 22 August 2020. Some exemptions remain for litigation funding schemes involved in insolvency litigation and litigation funding arrangements that are used in actions involving a single plaintiff.

ASIC relief for litigation funding

We have made ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 to manage the transition to the current regulatory regime for litigation funding and ensure that the Corporations Act operates effectively for litigation funding schemes. The instrument ceases to apply on 22 August 2025.

The instrument provides relief from:

  • the obligation to give a Product Disclosure Statement (PDS) to ‘passive’ members of open litigation funding schemes who are not known to or reasonably identifiable by the responsible entity of the scheme. This relief is provided on the condition the PDS is available on the website for the scheme and referred to in advertising material
  • the obligation to regularly value scheme property
  • the statutory withdrawal procedures for members who withdraw from a class action under court rules
  • the requirement to disclose detailed fees and costs information and information about labour standards or environmental, social or ethical considerations.

In respect of other obligations, ASIC Corporations (Disclosure in Dollars) Instrument 2016/767 provides temporary relief from certain dollar disclosures in PDSs for litigation funding schemes. This relief is currently due to expire on 28 April 2022. We have also issued a no-action position on the obligation to set up and maintain a register of members of a registered litigation funding scheme: see Chapter 2C of the Corporations Act. 

We will review this relief in due course, taking into account the final report final report of the current Parliamentary Joint Committee Inquiry into litigation funding and regulation of the class action industry and the outcomes of our current consultation seeking feedback on proposed guidance and relief for litigation funding.

We will consider applications for individual relief on a case-by-case basis. The varying nature of litigation funding schemes in the market that may require a more bespoke regulatory response for some schemes. Applications for relief must be in writing and should address the requirements set out in Regulatory Guide 51 Applications for relief (RG 51) and any other regulatory guides relevant to the application.

For more information on applying for ASIC relief, see Relief from financial services provisions.

Requirement to hold an AFS licence

If you carry on a business of providing financial services for a litigation funding scheme, you will generally need to hold an AFS licence. You must have your AFS licence from the day you start providing financial services.

You provide a financial service if you:

  • operate a registered managed investment scheme (registered scheme)
  • provide advice on a managed investment scheme
  • deal in interests in a managed investment scheme, and/or
  • provide custodial or depository services in relation to a managed investment scheme.

A litigation funding scheme is a managed investment scheme that will typically require registration.

How to 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
  • RG 105 AFS Licensing: Organisational competence, 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). These are the people by reference whom we assess your organisational competence.
  • RG 166 AFS Licensing: Financial requirements, which will help you determine the level of capital ASIC requires you to have, depending on the financial service you intend to provide
  • RG 248 Litigation schemes and proof of debt schemes: Managing conflicts of interest, 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:

  • INFO 240 AFS licence applications: Providing information for fit and proper people and certain authorisations, which outlines the additional information we need to assess a range of persons under a ‘fit and proper person test’ (set out in section 913BA of the Corporations Act)
  • Pro Forma 209 Australian financial services licence conditions, which sets out the standard licence conditions

Consultation on guidance and relief

On 9 July 2021, ASIC released Consultation Paper 345 Litigation funding schemes: Guidance and relief (CP 345) to seek feedback on proposed guidance and relief for litigation funding schemes. The consultation paper sets out ASIC’s proposals to:

Submissions on CP 345 are due on 20 August 2021.

FAQs

1. What AFS licence authorisations will be required for a litigation funding scheme? Why can’t I select 'litigation funding' when submitting Form FS01 Application for an AFS licence or Form FS03 Variation to an AFS licence?

The AFS licence authorisation(s) required will depend on the activities of the financial service and/or product provider.

For example, a litigation funding scheme provider may require authorisation to:

  • provide general advice to retail or wholesale clients on a managed investment scheme
  • deal by issuing interests in a managed investment scheme
  • deal by applying for, acquiring, varying or disposing of interests in a managed investment scheme
  • operate a registered scheme; to hold an AFS licence authorisation to ‘operate a registered managed investment scheme’, the entity must be a public company
  • depending on the particular circumstances, provide custodial or depository services.

You will need to consider which AFS licence authorisations are appropriate for your particular circumstances. Where necessary, you should also seek your own professional advice.

Form FS01 and Form FS03 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 Licensing team.

2. What organisational competence will responsible managers need to demonstrate for litigation funding schemes?

For most authorisations relating to litigation funding schemes, we will apply our standard approach to assessing organisational competence: see Regulatory Guide 105 AFS licensing: Organisational competence (RG 105).

We will consider litigation funding schemes that do not have a responsible manager with previous retail managed investment scheme experience. However, you must:

  • nominate a responsible manager that has operated an exempted litigation funding scheme involving retail clients and that has litigation experience
  • engage a law firm to help them meet their financial services retail client conduct and disclosure obligations.

3. What are some of the key licensing requirements for responsible entities of registered schemed that are ‘litigation funding schemes’?

The responsible entity must:

  • hold adequate professional indemnity insurance (see Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126))
  • hold adequate financial resources, including minimum net tangible assets (NTA) of an amount specified in RG 166
  • nominate responsible managers that collectively demonstrate both the ‘operate scheme’ and ‘assets under management’ elements of the organisational competence standards set out in RG 105 (RG 105.40)
  • pay the annual ASIC industry funding cost recovery levy
  • be a member of the Australian Financial Complaints Authority (AFCA).

An application for an AFS licence seeking the authorisation to 'operate a registered managed investment scheme' as a responsible entity will attract a 'high complexity' application fee. For more information, see Fees for commonly lodged documents.

4. What financial requirements will apply to litigation funders?

Our financial requirements for AFS licensees are outlined in RG 166. These requirements apply to responsible entities of litigation funding schemes without variation.

5. Why can’t I select ‘litigation funding’ as the scheme kind in Form 5100 Application for registration of a managed investment scheme?

Form 5100 does not currently provide for the scheme kind of ‘litigation funding schemes’. We will revise it in future updates to include this. In completing Form 5100 for a litigation funding scheme, please select ‘Other Primary Production’ as the scheme kind in section 1, and specify ‘Litigation funding scheme’ in the space provided.

Further information

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Last updated: 10/09/2021 04:24