The future of class actions - potential issues for financial institutions, their directors and insurers

The evolving class actions landscape in Australia continues to create both challenges and opportunities for financial institutions, their directors and insurers. Joined by Wendy Harris KC, we recently hosted an event at our Melbourne office on the current issues facing defendants and their insurers in securities and consumer class actions and what the future might hold.

Below we summarise the key themes from the panel discussion.

It is too early to call the end of securities class actions in Australia

While we have seen recent losses for class action law firms and funders (Myer; Iluka Resources; Worley; Zonia), we believe it is too early to call the end of securities class actions in Australia. The absence of proof of loss in these cases is likely to be overcome in future, similar, class actions with more focused attention of assumptions for the expert to prove market based causation loss – it is only a matter of time.

Our panel’s experience is that securities class actions are generally more challenging for plaintiffs’ lawyers to bring compared with consumer class actions. However, an emerging difficulty for some consumer class action litigants is the potential lack of commonality between claims of group members, frustrating causation and which may give rise to increasing applications to de-class a representative proceeding. Funders would likely have a greater interest in class actions at the consumer level (particularly with a growing focus on superannuation funds and privacy breaches), as there is likely to be stronger commonality between claims of group members at the individual level, and such challenges to the how the class is constituted may not arise. 

The OAIC is likely to be a forum for new forms of representative proceedings, with the Privacy Commissioner having an appetite for such claims and the power to award compensation. The potential size of the classes of individuals making up the class also makes them attractive to funders and plaintiff firms.

There is still a preference to commence class actions in the Federal Court

Following the introduction of the Group Costs Order regime in Victoria on 1 July 2020, Victoria is often considered a preferred forum for class actions with favourable class action funding arrangements. However, despite a record number of filings since 2020, our panel noted there is still a preference to commence class actions in the Federal Court. The panel considered that whether the Federal Court maintains these levels of filings is likely to be influenced by the pending decision of the High Court in R&B Investments v Blue Sky Alternative Investments which will determine whether the Federal Court has power to make Common Fund Orders.

If the High Court decides that the Federal Court does not have power to make a Common Fund Order, funders and the Court will be required to manage problems that may arise with “free riders”

It is possible that the High Court may agree that the Federal Court can make Common Fund Orders, but baulk at solicitors’ Common Fund Orders, noting the legislative prohibition on contingency fees for solicitors. If the High Court decides that the Federal Court does not have power to make a Common Fund Order, our panel was of the view that funders and the Court will be required to manage problems that may arise with “free riders”, (those who have signed not signed any agreement with the funder) who stand to benefit if the proceeding has a successful outcome or settlement.

Our panel agreed that Funding Equalisation Orders are likely to be where the Federal Court lands, and that the availability of this option may influence the High Court’s decision in Blue Sky, as the Court may consider there is already one way of dealing with the “free rider” problem facilitating the funder sharing its costs burden on the wider group.  However, for funders this means that they have to wait until the end of the proceeding, which may push them back to the Victorian Supreme Court, entering into arrangements with solicitors to fund security for costs and the like.  This provides earlier certainty but perhaps a lower return.

Funding sources for class actions can be relevant to insurers as their insureds as it can influence the strategy adopted in class actions

The panel agreed that the funding source for class actions can be relevant to insurers and their insureds as it can influences the strategy adopted in class actions, and be relevant to understanding who will be the negotiating party at the table in any settlement discussions.  The type of class action is also likely to inform the policies that might be called upon - whether the liability outcome may trigger D&O, PI, Cyber, trustee or other liability policies.   

Funders are also alive to current issues in the insurance market, including whether there is a hard or soft market for these products.  Likewise, funders and sophisticated plaintiff firms are alert to coverage issues that commonly arise and will craft allegations so as to avoid triggering exclusions, to ensure a potential source of recovery for any judgment awarded.

Although we have seen a greater increase in notifications of demands/threatened claims against individual directors and officers, it is difficult to understand what the return would be to funders

Although we have seen a greater increase in notifications of demands/threatened claims against individual directors and officers, it is difficult to understand what the return would be to the funders where involvement of individual respondents often sees them defending the proceeding vigorously, incurring additional defence costs, and thus draining the proceeds that might otherwise be available under a D&O policy. The consensus amongst our panel was that consideration would need to be given as to how the forensic presentation of the case seeking to identify conduct at an individual level which did not also create liability in the company - for example, some sort of misleading and deceptive conduct on the part of the individual or identifying the relevant individual involved in breaches of continuous disclosure obligations.

If you have any questions on the information provided, please reach out to a member of our Financial Lines team. We also have a guide on the Class Actions Regime in Australia, which outlines the procedural and funding differences between the different jurisdictions, which can be provided at your request.