December 8, 2020
There are many unsightly spectacles when federal parliament sits. None more so than Sarah Hanson-Young siding with the interests of big, unregulated businesses that make obscene returns from plaintiffs in class actions. But then, when it comes to a contest of ideas, the Greens senator often struggles to get off the starting block, let alone win a race.
Fortunately for Australians, another senator sided with common sense. By voting against Labor’s tawdry attempt to derail the regulation of litigation funders, Pauline Hanson has ensured Australia’s newest, sexiest and most lucrative asset class — one attracting ravenous investors from across the globe — will be subject to sensible regulations that apply to other providers of financial services.
To be sure, new attempts to regulate any industry should be analysed carefully for signs of government cluelessness, overreach and unintended consequences. But the Morrison government’s new regulations are both measured and sensible.
As Liberal senator James Paterson said during the disallowance debate last week, which part of requiring litigation funders to act efficiently, honestly and fairly offends Labor and the Greens?
We require suburban financial planners with meagre resources to hold a licence to sell financial services, Paterson said. So why not litigation funders?
Labor’s motive in siding with litigation funders is as plain as it is putrid. No longer able to count on rivers of gold from a declining trade union movement, the party is searching for new sources of funding.
Replacements include big class-action law firms, such as Maurice Blackburn, which donate generously to Labor. Working hand-in-hand with litigation funders, these law firms benefit when litigation funders reap rich, unregulated returns.
This strategy to secure the ALP’s future funding base by doing favours for big business is shortsighted. It will erode Labor’s moral authority, not to mention the party’s voting base, by revealing that the ALP protects the interests of lawyers and litigation funders over plaintiffs.
Hanson-Young’s unholy alliance with the big end of town is plain dumb. Perhaps the senator was bullied by the stream of baloney from litigation funders that have worked tirelessly to dodge even basic regulation.
Big litigation funders such as Omni Bridgeway and Burford Capital, with revenue streams dependent on a steady stream of lawsuits, are adept at cloaking their rich rewards in fluffy language about access to justice for poor plaintiffs.
Frankly, it’s a bit like listening to payday lenders pitch themselves as providing access to finance for the little guy. Marketing spin aside, we regulate payday lenders to make sure they don’t rip off consumers.
In the Senate last week, Hanson-Young described the move to regulate litigation funders as an “attack on democracy”. She sounded like a student politician in a pub debate who is unversed in detail.
Even those who are not born with a curious mind can learn to analyse simple facts that explain why litigation funders and their investors have flocked to Australia to enjoy the riches from an unregulated environment. And the riches are obscene. Unlike other asset classes, litigation funders enjoy massive returns that bear no correlation to the amount invested or the risk assumed. These firms brag to investors about this while talking about access to justice to the rest of us. It’s a sham. Funders pick off a tiny proportion of the ripest cases that would have made it to court anyway with lawyers working under a no win/no fee arrangement.
Litigation funders were emboldened by the moronic exemption granted to them by Chris Bowen in 2010 releasing them from the normal rules that apply to those who provide financial services to Australians. Labor’s former finance minister bequeathed the country an industry ripe for crooks and cowboys that our courts have done a crummy job reining in. The result: a litigation funding industry that can be as morally bankrupt as a casino where the house never loses.
If, in government, Labor, together with the Greens, repeats Bowen’s mistake and deregulates litigation funders again, the country should prepare for a tsunami of lawsuits pursued by a wider array of sharks and shysters among litigation funders.
It’s a safe bet that Hanson-Young has not explored what might come next in the litigation funding industry. Not many have. But close observers are predicting that as the market in lawsuits matures, litigation funders will repackage their investments in class action lawsuits, selling them into a secondary market for even higher returns.
Securitisation of litigation sounds terribly niche, but we have been here before. When investment banks bundled up home mortgages into exotically named collateralised debt obligations, investors couldn’t get enough. Then the market exploded, setting off the global financial crisis.
Securitising lawsuits is in its early stages. In September, UK company Forbes Ventures announced plans to securitise its litigation funding assets. A few years ago, Burford Capital, a big US litigation funder that also operates in Australia, tested the securitisation waters after it acquired, for less than $US18m, a legal claim from a plaintiff against the Argentinian government. Between December 30, 2016, and June 24, 2019, Burford sold 38.5 per cent of its interests in four tranches for a total of $US236m.
Liam Hennessy, a regulatory specialist with Gadens law firm, tells The Australian that “implies an approximate market value of $US613m, and is a multiple of 34 times Burford’s purchase price”.
“It is deeply unsettling when you stop to consider how these sales are being priced … and the lessons that came out from the GFC in relation to the comparatively much simpler mortgage-backed products.”
Just as mortgage-backed securities created dangerous risks, securitisation of this latest asset class of lawsuits will require wiser heads than Hanson-Young, and less conflicted ones than those in the Labor Party, to ensure naive plaintiffs are not pillaged and the economy is not plundered.