Australia is the birthplace and a global center for third-party litigation financing (“TPLF”). According to a 2010 study by NERA Economic Consulting, TPLF’s rise is a significant contributor to the recent increase in class actions in Australia.

TPLF firms do not just fund class actions in Australia – they often launch and manage the cases as well. Unfortunately, this often leads to the funders profiting at the expense of the class members. A recent example is the 2012 settlement with the Centro retail chain. The initial lawsuit alleged AU$1 billion in economic damages. However, the case was eventually settled for AU$200 million, with more than 30 percent ($62 million) going to IMF Australia, the funder that funded and managed the lawsuit. After subtracting additional fees, the class members were left with $106 million – just over 10 percent of the $1 billion they claimed was owed to them.

At the same time, there is growing concern about the lack of proper oversight for TPLF. In 2012, the Chief Justice of New South Wales told the Commonwealth Law Association that “litigation funders have, as their primary concern, the pursuit of profit by means of litigation (or settlement), while remaining one step removed from the oversight and inherent regulatory jurisdiction of the court.”

The Australian government should enact safeguards to prevent abuses and conflicts of interest related to TPLF. Unfortunately, recently promulgated rules by the government are inadequate to the task. In fact, the rules specifically exempt funders from licensing and disclosure requirements that apply to “financial products.” The government should consider meaningful safeguards, such as limiting funder control of litigation and requiring disclosure of funding contracts, in order to curb abuses and protect Australia’s justice system.

More information about third-party litigation financing can be found here.