Australia’s class action industry has developed significantly since the Federal Court’s class actions regime was introduced 25 years ago, most dramatically over the last 5 to 10 years.
Over the next 5 to 10 years, we predict:
+ Continued growth in the shareholder class action and litigation funding markets in the near term
We expect the accelerating growth in both shareholder class actions and litigation funding experienced in Australia over the last 5 to 10 years to continue in the near term. The continued flow of capital (including from off-shore) into the funding of shareholder class actions is unlikely to abate:
- while funders remain profitable, largely unregulated and subject to limited competition;
- until the current high levels of interest in shareholder class actions and litigation funding displayed in legal and financial markets and in the media subside somewhat; the disproportionate attention presently being paid to the funding of shareholder class actions acting as something of a self-fulfilling prophesy; and/or
- absent a meaningful shift in judicial and/or legislative sentiment away from facilitating the prosecution of shareholder class actions and/or towards tighter funding restrictions (for example, through the use of common fund orders to lower funding commission rates).
While continued growth in shareholder class actions and litigation funding in Australia is expected, the speed and scale of this growth should not be exaggerated. The size of Australian markets and relatively low number of historical shareholder claims are likely to impose natural limits on the number of claims arising over the short to medium period. As outlined below, the prospect of increased competition for litigation funders over the longer term may also dampen growth.
+ Increasingly widespread use of sophisticated data analytics by funders, plaintiff law firms and institutional investors to automatically identify shareholder claims
Over the short to medium term, we anticipate increasingly widespread use of sophisticated data analytics by funders, law firms and institutional investors to monitor public stock exchanges and automatically identify and correlate material price fluctuations to events like market disclosures. This will allow funders, law firms and institutional investors to identify a larger number of potential claims earlier and at a relatively low cost, thereby supporting continued growth in the shareholder class actions industry. It is worth noting that such software is already used by some funders and plaintiff firms.
+ A shareholder class action proceeding to judgment
To date, no shareholder class action commenced in Australia has proceeded to judgment. While we expect most shareholder class actions will continue to settle prior to trial, as plaintiffs (and those funding and running their claims) and defendants continue to value the certainty of settlement, we anticipate that before long the circumstances of a particular shareholder class action will be such that the claim is maintained to trial and judgment.
Delivery of such a judgment will be a watershed moment in the Australian class action industry, more likely than not to involve judicial acceptance of market based causation in the context of a shareholder class action. We expect that once someone steps through the looking glass, others will be emboldened to do the same. However, we would caution against expecting that one judgment will lead to a dramatic increase in the proportion of class actions which proceed to judgment. The US data demonstrates that funders, plaintiff law firms and defendants overwhelmingly continue to value the certainty of settlement.
+ Increased visibility of institutional investors in the shareholder class action space
Although institutional investors traditionally hold around 80 – 90% of the value of shares in a shareholder class action, to date, no institutional investor has been a lead plaintiff in a securities class action. In circumstances where: - defendants are agitating for institutional investors to put on evidence in proceedings regarding the purchasing of the securities the subject of the class action; - institutions are being put under pressure by their investors to be actively involved in class actions; and - firms such as Investor Claim Partner are offering class action advisory services to institutional investors and acting as conduits between institutional investors on the one hand and plaintiff law firms and litigation funders on the other, we anticipate that institutional investors will become more visible in securities class actions, potentially as lead defendants.
+ A traditionally ‘defence side’ firm will begin representing class action plaintiffs
We expect that as the shareholder class actions market grows, at least one major law firm which has typically represented corporate clients will also begin representing class action claimants; a position taken by some US law firms. Two factors which increase the likelihood of a defendant firm taking this position are:
- the increased involvement of institutional investors in the shareholder class action space, such investors being potentially lucrative repeat clients; and
- the likely eventual abolition of the prohibition on lawyers charging contingency fees, the ability to charge such fees increasing the attractiveness of representing class action claimants.
+ Increased pressure on litigation funders developing over the medium to longer term, including as a result of the introduction of contingency fees
While we anticipate continued growth in the litigation funding market in the short to medium term, we also expect that funders will face increasing challenges over the medium to longer term. Some of these may exert downward pressure on funding commissions, either directly or through increased competition, and may thereby moderate funders’ current enthusiasm for investing in shareholder class actions in Australia:
- Australian markets are not large enough to sustain an unlimited number of funders. Given the relatively small number of shareholder claims which arise in Australia, we expect the entry of additional funders into this market over the short to medium term to exert downward pressure on funding commissions over time.
- We also expect that (in line with the Productivity Commission’s recommendation) the current prohibition on lawyers charging contingency fees will eventually be abolished. This will increase the competition faced by funders as plaintiff law firms (whose fees presently equate to approximately 10-15% of settlement funds and/or their funding arms, some of which already seek to raise capital (including by listing on equity markets) in order to fund claims themselves, seek to win a share of the lucrative litigation funding market away from funders (who presently take approximately 35-40% of settlement funds. Eventually this squeeze on funders may lead to something of a merger between funders and plaintiff law firms with a consequent redistribution of settlement funds.
- The Courts may exert direct pressure on funders to lower their commission rates below the current average of 31% by imposing lower rates in common fund orders following the Money Max decision.
+ The default and/or collapse of a litigation funder leading to increased regulation of the funding market
We also expect increased pressure on funders to result from the introduction of regulation of the litigation funding industry, including mandatory licencing and capital adequacy requirements. While such regulation has been posited for a number of years (and was recommended by the Productivity Commission), to date, political appetite for taking these steps has been low. We anticipate this inertia to continue absent a trigger for change such as the default and/or collapse of a funder leaving claimants’ legal fees unpaid and claimants potentially stranded. In this scenario, which in our view is more likely than not to eventuate over the medium to longer term as a result of the increased pressure on funders outlined above, the government may be forced to take necessary action to regulate the funding industry.