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New Licensing Requirements for Litigation Funders?

In order to improve regulatory oversight in this area, Treasury has announced that litigation funders will be required to hold an Australian Financial Services Licence (AFSL), categorising them as a managed investment scheme.

What is the intention of the amendment?

This proposed reform is intended to complement an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding and the regulation of the class action industry. Submissions to that inquiry are being accepted until 7 December 2020.

In a recent media release, Treasurer Josh Frydenberg noted that “litigation funders are currently exempt from holding an AFSL and being categorised as a managed investment scheme. As a result, litigation funders do not face the same regulatory scrutiny and accountability as other financial services and products under the Corporations Act.”.

The media release provided that the change will take effect from 22 August 2020.

What obligations come with holding an AFSL?

Generally, AFSL holders are required to:

  • act honestly, efficiently and fairly;
  • maintain an appropriate level of competence to provide financial services;
  • have adequate financial, technological and human resources to provide the financial services covered by the licence;
  • comply with conduct and disclosure requirements, including the duty to act in the clients’ best interests and manage any conflicts; and
  • have a dispute resolution system that consists of an internal dispute resolution mechanism, and membership of AFCA.

What obligations apply to managed investment schemes?

Managed investment schemes are already required to hold an AFSL and, if registered, must have a:

  • Responsible Entity to oversee their finances and operations;
  • Constitution that meets the requirements in ss 601GA and 601BG of the Corporations Act 2001 (Cth); and
  • Compliance Plan that meets the requirements in s 601HA of the Corporations Act 2001 (Cth).

If a majority of the directors of the Responsible Entity are internal directors, you will also need to establish a Compliance Committee with a majority of external members.

What should litigation funders do now?

Litigation funders should seek professional legal advice on the AFSL application process to ensure an understanding of ASIC’s processes and ensure your firm has the appropriate expertise, resources, policies and oversight to comply with the law and your licence conditions.

If you have further questions on this topic, please contact our Financial Services Team.

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