SYDNEY (Reuters) - The Australian government is tightening regulatory scrutiny of wealthy litigation funders, clamping down on the industry following a surge in costly class action lawsuits.
Treasurer Josh Frydenberg said on Friday that litigation funders will be required to hold an Australian financial services provider licence within three months, increasing transparency and accountability of the sector.
The class action industry in Australia had a later start than in the United States but has grown quickly since legal changes allowed for such lawsuits in 1992, helped by a favourable regulatory environment.
Frydenberg said removing the licence exemption for litigation funders, which are currently categorised as a managed investment scheme, would ensure they "operate transparently, are appropriately regulated and accountable."
Litigation funders provide financing for lawsuits in exchange for a share of any settlement or judgment. If the litigant loses, it does not have to repay the financial investor.
Companies such as Omni Bridgeway Ltd (AX:OBL), formerly IMF Bentham, and Maurice Blackburn, have funded more than 300 class action suits in Australia, including against the country's major banks.
About 49% of class actions filed in the Federal Court were funded by third-party litigation funders in the three years to September 2016, but that rose to 78% in 2018, the Sydney Morning Herald reported, citing government estimates.
The clampdown comes just a week after the government announced a parliamentary committee inquiry into the class action industry, which is due to report in December.
Launching the inquiry, Attorney-General Christian Porter said in many cases, funders were taking up to 30% of legal settlements, "leaving members of the action to fight over the scraps that remain" after legal fees and other costs were paid.