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ONE of the most senior representatives of the US business community has warned that the risk of doing business in Australia will rise if the federal government adopts a light-touch approach to regulation of the litigation funding industry.
Lisa Rickard, who is executive vice-president of the US Chamber of Commerce, is concerned that if the oversight of this industry is left to the courts "there is no doubt about the fact that it will add to the risk of doing business".
Her warning came soon after notes from draft regulations drawn up by federal Treasury suggested a licensing requirement for litigation funders was considered to be "excessively burdensome".
This was because Treasury believed other measures such as court orders for funders to provide security could be used.
However, the Australian Institute of Company Directors has told Treasury that the draft regulations underestimate the difficulty of obtaining security for costs orders and that these orders are traditionally limited to the parties to proceedings, not third parties.
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The AICD also raised concerns that a key provision in Treasury's proposed regulatory scheme for litigation funders appeared to be ultra vires -- or beyond power -- and therefore potentially invalid.
This view about potential invalidity is in line with the assessment of leading litigation funder IMF (Australia), which is the only litigation funder to hold a financial services licence.
The AICD and the US Chamber's Institute for Litigation Reform, which is led by Ms Rickard, have urged the government to expand the draft regulations to include a licensing scheme.
Ms Rickard, who is visiting Australia for talks with peak business organisations, addressed the American Chamber of Commerce in Sydney this week about trends in anti-business litigation in the US and Australia.
She told The Australian she feared the combination of class actions and lightly regulated litigation funders meant Australia was at risk of embracing the worst of the US litigation culture.
"When the prospects are there for lawyers and the financing companies to make a profit out of class action litigation, it is just too great a draw to ignore," she said.
She believed it was not her place to outline detailed proposals on how Australia should go about regulating its litigation funding industry.
"We are not here to tell Australians how to administer their justice system," she said.
"We are here to share our experience."
However, the Institute for Litigation Reform suggested to the Australian Treasury last year that safeguards should be put in place to prevent abuses by companies that finance court cases for a proportion of any financial settlement or damages award.
She said the purpose of her visit was to share information about the factors that had led to the rise in the US of what she described as "the extortion model" of class actions against business.
The US Chamber of Commerce decided to embark on a fact-finding trip to Australia after it became concerned over the presence in the US of foreign litigation funding companies.
Those companies include Bentham Capital, a subsidiary of IMF (Australia).
Bentham Capital's US team is led by Ralph Sutton, who helped found and run the litigation funding operations of Credit Suisse in the US.
According to Fortune magazine, the leading players in the US litigation funding industry include aggressive hedge funds such as Reservoir Capital of New York and Eton Park of London.
Other players in the US market are Burford Capital, Juridica, Credit Suisse, and the recently launched US funders BlackRobe and Fulbrook.
According to Fortune, "England and Australia have embraced litigation financing even more enthusiastically than America has."
Ms Rickard said there was a high degree of concern about the potential impact of Australian and other foreign litigation funders in the US.
"So we wanted to come, we wanted to study it here."
She said she was equally concerned about the impact on US companies in Australia of class actions financed by lightly regulated litigation funders.
In the US, she said, the combined impact of class actions and unregulated litigation funders "creates a somewhat toxic cocktail from our perspective".
Many American companies had found it impossible to withstand class actions run by well-resourced plaintiff firms that commissioned aggressive public relations campaigns and frequently stood to gain far more financially than their clients.
"They know companies are going to settle . . . they show up on Wall Street and they go and talk to your institutional investors and analysts, and a company cannot take that," she said.
"From the companies' perspective there are a lot of issues to do with reputational harm and the impact on stock prices."
She said Australia was still a long way from becoming a "jackpot jurisdiction".
"The US is, far and away, ahead of the pack on class actions and the financing of litigation through the plaintiffs bar and the use of contingency fees."
