By Steve Mark, Legal Services Commissioner, NSW

Over the past three years since the decision in the High Court permitting litigation funding (Campbells Cash & Carry Pty Ltd v. Fostif Pty Ltd [2006] HCA 41) and the Federal Court’s determination that litigation funding should be treated as a managed investment scheme (Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147) there has been much debate about the regulation of litigation funding in Australia. The issue remains unresolved. At present in Australia third party litigation funding continues to remain unregulated. 

In our view, the failure to establish an effective and permanent regulatory regime is likely due to the misclassification by policy that the regulation of litigation funding should fall under the rubric of financial services.  This classification has centered debate around the role of ASIC in litigation funding. Despite considerable attention by both ASIC and the courts in Australia, no formal classification of third party litigation funding as financial service has been made. We can understand the hesitation.

Third party litigation funding while related at least in part to financial services, is in our view, more closely aligned to the practice of law. We consider that rather than classifying third party litigation funding as a financial product to be regulated by the corporate regulator, third party litigation funding should be classified as a legal service, and one which constitutes a fiduciary relationship between the funders and their clients, particularly where the funder maintains control over the litigation.

Litigation funders can play a role that largely mirrors that of a law firm. Litigation funders, for example, choose which cases to fund, which lawyers to engage with, which clients to support and what litigation tactics should be followed. From a commercial perspective, this may make sense, but it seems to interfere with an individual’s right as to their choice of lawyer and with a lawyer’s duty to a client of confidence, full disclosure and confidentiality. Indeed, it would be surprising if litigation funders were not primarily staffed by people with at least legal knowledge as they would require this to be able to make these decisions.  Regulating such litigation funders in the same manner as legal practices should thus not be a fundamental change.

In this regard, a litigation funder could be said to be performing legal work. If that is the case, then like all other legal practitioners, the primary duty of a litigation funder should be to the Court with the ethical responsibilities and duties that that entails, and secondly to the client.

The characterization of third party litigation funding as falling within the realm of legal services for the purposes of regulation is not unique. In both the United States and in the United Kingdom discussions and action about the regulation of third party litigation funders has primarily occurred amongst the regulators of the legal profession. For example, in the United States, litigation funding is presently being considered by the American Bar Association Ethics 20/20 Commission and in the United Kingdom, litigation funding has been considered by the Civil Justice Council. There appears to be a distinct trend in locating regulatory discussion about litigation funding in the realm of law rather than as a manifestation of financial services. The OLSC submits that we ought to continue the tradition of discussing the regulation of litigation funding by placing it in the legal sphere, not in the realm of financial services as has been done to date.

We submit that litigation funders ought thus be regulated in a manner similar to that of incorporated legal practices, who like litigation funders are also intimately connected with the provision of legal services and the practice of law.  This regime requires incorporated legal practices to appoint a legal practitioner director and adopt and implement an "ethical infrastructure" - that is formal and informal management policies, procedures and controls, work team cultures, and habits of interaction and practices  - that support and encourages ethical behaviour that is overseen by a legal practitioner. 

A legal practitioner director like all lawyers has a primary duty to the Court. As a director, a legal practitioner director also has a duty to the corporate regulator.  In addition to the normal duties under the Legal Profession Act 2004 a legal practitioner director of an ILP has an additional responsibility to ensure that the practice implements and maintains “appropriate management systems” to enable the provision by the corporation of legal services. 

‘Appropriate management systems’ are not defined in the LPA 2004. The OLSC has however in collaboration with the Law Society of NSW, the College of Law,  LawCover and many others developed key criteria to ascertain whether an ILP has ‘appropriate management systems’ in place. The key criteria set out what the OLSC considers to be the ten objectives of a sound legal practice.

To assist legal practitioner directors to comply with the requirement of adopting an implementing an appropriate management system a standard ‘self-assessment document’ was developed to assess management systems. This self-assessment document is sent to ILPs on incorporation. The self-assessment document takes into account the varying size, work practices and nature of operations of different ILPs, eschewing an inappropriate ‘one size fits all’ approach requiring the fulfillment of uniform criteria. The self-assessment document instead suggests indicative criteria to assist legal practitioner directors to address each of the ten objectives along with examples of what an ILP may do that would provide evidence of compliance. For example, regarding ‘competent work practices to avoid negligence,’ the self-assessment document suggests as a criterion that ‘fee earners practice only in areas where they have appropriate competence and expertise’. A ‘written statement setting out the types of matters in which the practice will accept instructions and that instructions will not be accepted in any other types of matters’ would provide evidence that this criterion had been met. Legal practitioner directors then rate the ILP’s compliance with each of the ten objectives as either ‘Fully Compliant’, ‘Compliant,’ ‘Non-Compliant’ or ‘Partially Compliant’.

The general principles enunciated above establish an effective ethical infrastructure for incorporated legal practices. Though lawyer-centric, the ten objectives are essentially a management tool to ensure ethical behaviour of all members of a firm including non-lawyers. The ten objectives can thus be utilized, if amended, by a wide variety of organizations seeking to promote and ensure ethical behavior. The framework for regulating incorporated legal practices are thus certainly applicable for regulating third party litigation funders who like ILPs are inherently involved in the practice of law.

*  This opinion piece derives from joint authored paper with Tahlia Gordon,  available here.