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Requirements for Litigation Funders to hold an Australian Financial Services Licence

Litigation funders must hold an Australian Financial Services Licence (AFSL) as part of the regulatory regime implemented in August 2020. Prior to August 2020, litigation funders were exempt from holding an AFSL and being categorised as a managed investment scheme. To manage the transition to the current regulatory regime and to ensure that the Corporations Act 2001 (Cth) (the Corporations Act) operates effectively for litigation funding schemes, ASIC has made ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 (Instrument).

The Instrument and included exemptions made available to responsible entities of litigation funding schemes under the regime are subject to a five-year sunset date which occurs on 22 August 2025.

How does the Instrument support Litigation Funders?

The Instrument provides exemptions to responsible entities of litigation funding schemes from certain provisions in Chapter 5C and 7 of the Corporations Act to address practical difficulties litigation funders may face when transitioning to the new regime. These include:

  • the obligation to give a Product Disclosure Statement (PDS) to ‘passive’ members of open litigation funding schemes on the condition that the PDS is available on the scheme operator’s website 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; and
  • the requirement to disclose detailed fees and costs information and information about labour standards or environmental, social or ethical considerations.

At the end of the Instrument term, litigation funding schemes will be required to comply with the full AFSL requirements and no longer rely on the exemptions contained in the primary instrument.

ASIC will continue to monitor and modify, if necessary, the Instrument to ensure that it is operating effectively and consistently with the legislative framework applicable to litigation funding schemes.

ASIC’s No-Action Position

ASIC is aware of the difficulties responsible entities of registered litigation funding schemes may encounter when complying with the obligations to set up and maintain member registers under Chapter 2C of the Corporations Act in relation to representative proceedings in which there are passive general members who cannot be individually identified.

Therefore, ASIC has adopted a ‘no-action’ position in relation to the obligations under sections 168 and 169 of the Corporations Act for litigation funders. The no-action position means that ASIC will not take regulatory action in relation to a breach of these sections. The purpose of this position is to provide an indication as to the future regulatory action ASIC might take.

What steps to take now?

Litigation funders who have not yet applied for an AFSL must do so as soon as possible. Litigation funders must also be aware of their obligation to comply with the Act, with particular regard to PDSs, scheme constitutions and compliance plans.

Background

The Instrument was implemented to support the transition to the licensing and regulatory framework for litigation funding schemes. After consulting with the Department of the Treasury in relation to the effect of the Instrument, ASIC made an amending instrument to.

The amending instrument as made in response to:

Further Reading

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