Litigation funders partly or wholly fund the costs of litigation in return for a portion of the proceeds if the action is successful.
A litigation funding scheme is generally an arrangement where a group of plaintiffs (the class action members), a law firm and a litigation funder collaborate to pursue a class action. Since a Federal Court case in 2009, this type of arrangement has been understood to constitute a managed investment scheme (MIS).
Until recently, the Corporations Regulations 2001 specified that:
- a person providing financial services for litigation funding schemes were exempt from the requirement to hold an AFS licence (if they maintain and apply adequate practices for managing conflicts of interest), and
- litigation funding schemes were exempt from being a MIS or a credit facility.
The changes do not apply to litigation funding schemes entered into before 22 August 2020. The exemptions that apply for litigation funding schemes involved in insolvency litigation and litigation funding arrangements that are used in actions involving a single plaintiff will remain.
Please continue to visit this page for more information and guidance for litigation funding as ASIC expects to update it from time to time.
Who must hold an AFS licence
You must hold an AFS licence to conduct a financial services business in Australia unless authorised to provide those services as a representative of another person who holds an AFS licence, or otherwise exempt.
A financial services business is a business of providing financial services. A person provides a financial service if they operate a registered managed investment scheme.
Subject to grandfathering provisions, you will need to have your AFS licence from the day you start your financial services business.
Apply for an AFS licence
You can apply for an AFS licence online using our eLicensing system, which individually tailors the application to your business.
Read these publications before submitting your AFS licence application:
- AFS Licensing Kit (Regulatory Guides 1 to 3), which provides an overview of the application process and information on supporting proof documents
- AFS Licensing: Organisational competence (RG 105), which provides guidance on the knowledge and experience we require of responsible managers, i.e. the people who are directly responsible for significant day-to-day decisions about the provision of financial services, and by reference to whom we assess your organisational competence.
- AFS Licensing: Financial requirements (RG 166), which assists with determining the level of capital ASIC requires depending on the financial service you intend to provide
- Litigation schemes and proof of debt schemes: Managing conflicts of interest (RG 248), which explains how a person who provides a financial service can satisfy the obligation to maintain adequate practices and follow procedures for managing potential and actual conflicts of interest in relation to a litigation scheme or a proof of debt scheme.
You should also read:
- Information Sheet 240, which outlines the additional information required by ASIC to assess a range of persons under a ‘fit and proper person test’ set out in section 913BA of the Corporations Act.
- ASIC Pro Forma 209, which sets out the standard licence conditions.
Generally, a managed investment scheme (MIS) must be registered if it has more than 20 members or is promoted by a person who is in the business of promoting MISs. Some MISs may be exempt from registration, for example wholesale schemes.
To register a MIS, the proposed responsible entity must be a public company and hold an AFS licence with authorisations to operate the MIS.
Your application to register a MIS must:
- contain details of the MIS, proposed responsible entity and auditor of the compliance plan; and
- be accompanied by a copy of the constitution, compliance plan and a statement signed by the directors that the constitution meets the requirements of s601GA and s601GB and compliance plan meets s601HA of the Corporations Act.
Find out more on how to register a managed investment scheme.
A registered MIS must have a legally enforceable constitution between the members and the responsible entity. The constitution must make adequate provision for, or specify certain prescribed matters, including:
- consideration to be paid to acquire an interest in the MIS;
- powers of a responsible entity to invest or deal with the scheme property and borrowing powers (if any);
- the responsible entity’s rights (if any) to be paid fees or indemnified out of scheme property;
- dealing with complaints;
- any rights of members to withdraw from the MIS and adequate withdrawal procedures; and
- process for winding up.
A registered MIS must have a compliance plan that sets out adequate measures to ensure that the responsible entity complies with the Corporations Act and the constitution of the MIS.
You should have arrangements in place to ensure that:
- all scheme property is clearly identified and held separately from the property of the responsible entity and any other scheme;
- the compliance committee (if one is required) functions properly;
- scheme property is valued at regular intervals appropriate to the nature of the property;
- the compliance plan is audited; and
- adequate records of the MIS operations are kept.
Obligations as an operator of a registered MIS
As an operator of a registered MIS, you have a range of obligations under the Corporations Act. These include but are not limited to:
- holding an AFS licence to operate a registered MIS as the responsible entity.
- meeting financial requirements, namely solvency and net assets, cash needs and audit requirements.
- providing upfront product disclosure i.e. providing Product Disclosure Statements.
- acting in the best interests of members and giving priority to members’ interests if there is a conflict.
- adequately managing conflicts of interest.
- meeting internal and external dispute resolution requirements.
- meeting professional indemnity insurance requirements.
On 4 August 2020, ASIC held a roundtable on litigation funding for industry.
For more information on registered MISs, please refer to the following regulatory guides:
- Funds management: Establishing and registering a fund (RG 131) provides guidance on the requirements to establish and register an MIS.
- Funds management: Compliance and oversight (RG 132) provides guidance on the compliance and oversight obligations that certain entities (such as responsible entities) must meet under the Corporations Act.
- Funds management: Constitutions (RG 134) outlines the requirements in the Corporations Act for the constitutions of registered schemes.