Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1)

Administered by Department of the Treasury

Legislation au F2012L02414 Regulations Not in force Legislative Instrument

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EXPLANATORY STATEMENT

 

Select Legislative Instrument 2012 No. 308

 

Issued by authority of the Minister for Financial Services and Superannuation

 

Subject - Corporations Act 2001

 

Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1)

 

The Corporations Act 2001 (the Act) provides for the regulation of corporations and financial markets, products and services, including in relation to licensing, conduct, financial product advice and disclosure.

 

Subsection 1364(1) of the Act provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations, or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act. 

 

The Corporations Amendment Regulation 2012 (No. 6)was made on 12 July 2012 with a commencement date of 13 January 2013.  The intention of the Corporations Amendment Regulation 2012 (No. 6) was to clarify that litigation funding schemes, as well as similar arrangements, were not managed investment schemes (MIS), and therefore not subject to the regulatory requirements applying to MIS.  The regulatory requirements of MIS include registration, licensing, conduct and disclosure. 

 

The Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1) (the Regulation) makes a number of technical changes to Corporations Amendment Regulation 2012 (No. 6). These changes ensure that the Corporations Amendment Regulation 2012 (No. 6) operates effectively.  One of the technical changes the Regulation makes is to remove the requirement that the funder and lawyer not be members of the litigation funding scheme.  If the requirement was not removed, then should a funder or lawyer be part of a litigation funding scheme the scheme would still be considered a MIS and be subject to the regulatory requirements of a MIS.

 

The Regulation also excludes a litigation funding arrangement (which involves a single claimant) from the definition of a MIS to ensure that litigation funding involving a single claimant is subject to the same regulatory requirements that apply to litigation funding schemes.

 

Furthermore, in response to the High Court finding in International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) [2012] HCA 45 that a litigation funding arrangement was a credit facility, the Regulation makes litigation funding schemes and arrangements financial products.  It also expressly excludes litigation funding schemes and arrangements from being credit facilities.  The result is that litigation funding schemes and arrangements are subject to the regulatory requirements of the Corporations Act.

 

The Regulation also, by making the litigation funding schemes and arrangements financial products, subjects them to conflict of interest obligations. The Regulation does not subject conditional fee arrangements between a lawyer and a client (not involving a third party funder) to conflict of interest obligations.

 

Details of the Regulation are set out in the Attachment.

The Regulation commences the day after registration.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

This Legislative Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Legislative Instrument

The purpose of the legislative instrument is to ensure that litigation funding schemes and litigation funding arrangements are not managed investment schemes or credit facilities for the purposes of the Corporations Act 2001.  It is also to subject litigation funding schemes and litigation funding arrangements to conflict of interest provisions.

Human rights implications

This Legislative Instrument engages Article 14 of the International Covenant on Civil and Political Rights.  Article 14 guarantees that all persons shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law in the determination of his rights and obligations in a suit at law.  This regulation promotes access to justice by providing an alternative mechanism for claimants to pursue their rights in court.  This permits claims to be brought that might not otherwise have been brought in the absence of this reform.  For example, the claimants may lack the financial resources to finance their lawsuit or where the compensation for individual claimants is likely to be too small to justify a lawsuit but where the compensation for the entire class is likely to be substantial.

Conclusion

This Legislative Instrument is compatible with human rights.

 


ATTACHMENT

Details of the Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1)

 

Section 1 – Name of Regulation

This section specifies the name of the Regulation as the Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1).

Section 2 – Commencement

This section provides for the regulation to commence the day after registration.

Section 3 – Amendment of the Corporations Amendment Regulation 2012 (No. 6)

This section provides that Schedule 1 amends the Corporations Amendment Regulation 2012 (No. 6).

Schedule 1 – Amendments

Item 1 amends the commencement day of the Corporations Amendment Regulation 2012 (No. 6), so that it commences on 12 July 2013, a further six months after the original commencement date of the Corporations Amendment Regulation  2012 (No. 6) of 13 January 2013.

 

Item 2, pursuant to paragraph (n) of the definition of managed investment scheme in section 9 of the Corporations Act 2001 (the Act), substitutes Schedule 1 Item 1 of the Corporations Amendment Regulation 2012 (No. 6) with a new provision excluding a litigation funding scheme and a litigation funding arrangement from the definition of a managed investment scheme. 

 

The definition includes the key elements of a litigation funding scheme, which are that general members of the action are obtaining funding from a third party to pay for legal services in order to seek remedies based on either similar circumstances giving rise to common issues of law or fact, or are otherwise appropriately dealt with together.  Similarly, the item includes the key elements of a litigation funding arrangement, which are that a person seeking remedies is obtaining funding from a third party to pay for legal services.

 

Item 1A, pursuant to paragraph 764A(1)(m) of the Act, lists a litigation funding scheme and a litigation funding arrangement as financial products.

 

Item 1B excludes a litigation funding scheme and a litigation funding arrangement from being credit facilities.

 

Item 3 amends items [5] to [10] of Corporations Amendment Regulation 2012 (No. 6).

 

Item 5 ensures that any person providing a financial service in relation to a litigation funding scheme or arrangement does not need to obtain an Australian financial services licence. 

 

Item 6, pursuant to paragraph 926B(1)(c) of the Act, requires that litigation funders have practices and procedures for managing conflicts of interests.  It provides that a person breaching those requirements is committing an offence under the Corporations Act and is liable to a penalty of 50 penalty units.

 

Item 7 exempts financial services licensees and authorised representatives of licensees from the requirements in Part 7.7 of the Act for financial services provided to retail clients who are not in Australia.  Part 7.7 contains a range of disclosure and other requirements.

 

Item 8, pursuant to paragraph 992C(1)(a) of the Act, excludes a person offering a litigation funding scheme or litigation funding arrangement from the prohibition on hawking in s992A of the Act.

 

Item 9, pursuant to paragraph 1020G(1)(a) of the Act, excludes litigation funders from part 7.9 of the Act.  Part 7.9 contains a range of requirements relating to product disclosure, and other provisions relating to the issue, sale and purchase of financial products. 

 

Overview

The Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1), issued by the Minister for Financial Services and Superannuation under the Corporations Act 2001, was enacted to refine and clarify the regulatory framework governing litigation funding schemes and arrangements. The initial Corporations Amendment Regulation 2012 (No. 6), made on 12 July 2012, aimed to delineate that such schemes and arrangements do not constitute managed investment schemes (MIS), thus exempting them from the stringent regulatory requirements applicable to MIS. However, the subsequent Amendment Regulation 2012 (No. 1) introduced technical amendments to ensure the effective operation of the 2012 regulation. These changes included exempting litigation funding arrangements involving a single claimant from the definition of a MIS and classifying litigation funding schemes and arrangements as financial products, subjecting them to specific regulatory obligations. The primary objective was to align the regulatory treatment of litigation funding with the broader legal and financial ecosystem while ensuring that these arrangements adhere to necessary conflict of interest obligations. This legislative instrument was designed to address the identified gap where litigation funding arrangements were inadvertently classified as credit facilities, which was resolved by explicitly excluding them from such classification. Additionally, by subjecting litigation funding to conflict of interest provisions, the regulation aimed to maintain the integrity and fairness of the legal process. The regulatory measures were intended to promote access to justice by facilitating alternative funding mechanisms for claimants, thereby enhancing the availability and effectiveness of legal recourse for those who might otherwise be unable to pursue litigation due to financial constraints.

Scope and Application

The Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1) amends the Corporations Amendment Regulation 2012 (No. 6), which was made under the Corporations Act 2001. The primary purpose of this regulation is to clarify the treatment of litigation funding schemes and arrangements under the Corporations Act, ensuring they are not classified as managed investment schemes (MIS) and are therefore exempt from the regulatory requirements that apply to MIS, such as registration, licensing, conduct, and disclosure. Instead, these schemes and arrangements are recognised as financial products, which subjects them to certain regulatory obligations, including conflict of interest provisions. The regulation also explicitly excludes litigation funding schemes and arrangements from being considered credit facilities. It further refines the scope of these arrangements to ensure that only those involving multiple claimants are subject to the regulatory framework, while single-claimant arrangements remain outside the regulatory perimeter. The Regulation applies to all entities and individuals involved in providing or managing litigation funding schemes and arrangements within Australia, ensuring they comply with the specified regulatory requirements. This includes fund managers, lawyers, and any other parties involved in such schemes, ensuring they adhere to the outlined obligations to avoid penalties under the Corporations Act. The Regulation commences the day after its registration.

Key Provisions

The Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1) (the Regulation) primarily serves to refine the scope and regulatory framework surrounding litigation funding schemes and arrangements (sections 1 and 3). This regulation ensures that litigation funding is not classified as a managed investment scheme (MIS) or a credit facility, thereby exempting it from specific regulatory requirements associated with these categories. Moreover, it includes litigation funding schemes and arrangements as financial products, thereby subjecting them to certain regulatory oversight, including conflict of interest obligations. Notably, conditional fee arrangements between lawyers and clients that do not involve a third-party funder are excluded from these conflict of interest obligations. Under this Act, certain obligations and requirements are placed on parties involved in litigation funding. Specifically, litigation funders are mandated to implement practices and procedures to manage conflicts of interest, as outlined in Item 6 of Schedule 1 (section 3). Failure to comply with these requirements constitutes an offence under the Corporations Act and attracts a penalty of 50 penalty units. Additionally, Item 5 of Schedule 1 exempts providers of financial services related to litigation funding from needing an Australian financial services licence. However, these providers must still adhere to other applicable regulatory requirements, such as those related to disclosure for retail clients, if they are operating outside Australia. The Regulation also delineates the consequences for non-compliance with its provisions. For instance, breaching the conflict of interest management requirements for litigation funders is an offence under the Corporations Act and is punishable by a penalty of 50 penalty units (section 3, Item 6). Furthermore, the Regulation exempts certain entities from specific regulatory obligations, such as the prohibition on hawking and requirements for product disclosure, as outlined in Items 8 and 9 of Schedule 1 (section 3). These exemptions are intended to streamline the regulatory environment for litigation funding while still ensuring adequate oversight and protection for participants. In conclusion, the Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1) provides a tailored regulatory framework for litigation funding, distinguishing it from managed investment schemes and credit facilities. It subjects litigation funding to specific obligations, such as conflict of interest management, while exempting certain activities from other regulatory requirements. Breaches of the specified conflict of interest obligations are subject to penalties, ensuring compliance and maintaining the integrity of the litigation funding process.

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