Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Economics References Committee
Treasury Laws Amendment (2021 Measures No.1) Bill 2021, Provisions

SAKER, Mr Andrew, Managing Director and Chief Executive Officer, Omni Bridgeway Limited


CHAIR: Thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. As noted in the information sent to you, parliamentary privilege applies only to people giving evidence in Australia. Parliamentary privilege is a special right that means you cannot be prosecuted or disadvantaged because of anything you have provided in evidence that has been accepted by the committee or because you gave this evidence. However, because this privilege only applies within Australia a person outside Australia will not be protected by parliamentary privilege.

This hearing is being broadcast live and recorded. A transcript is being made and will be published. As such, you may wish to refrain from making adverse comment upon any person or corporation or referring to legal proceedings. I would like to advise witnesses that answers to any questions on notice should be sent to the secretariat by 5.30 pm on Wednesday, 16 June 2021. I now invite you to make a brief opening statement should you wish to do so.

Mr Saker : I thank the committee for the opportunity to appear before you today. Omni Bridgeway is a global leader in dispute resolution finance and Australia's largest and most experienced litigation funder. Listed on the ASX in 2001, we are a proudly Australian company with a long track record of innovation, which has now expanded across the globe into Europe, North America, the Middle East and Asia. We participated in last year's Parliamentary Joint Committee on Corporations and Financial Services inquiry into litigation funding and class actions, and support both the requirement for licensing and the application of the managed investment scheme to class actions. Omni Bridgeway's submission in relation to the Treasury Laws Amendment (2021 Measures No.1) Bill 2021[Provisions] focuses on schedule 2 of the bill, which seeks to alter the continuous disclosure and misleading and deceptive conduct provisions.

Clearly, those who are expert in investments and financial markets are better qualified than Omni Bridgeway to comment on the importance and effectiveness of the existing continuous disclosure obligations and the changes proposed. However, we understand from evidence provided by the ASIC to the 2018 ALRC inquiry into class actions and litigation funding that the existing continuous disclosure obligations play an essential role in the ongoing success of Australia's financial markets. This view seems to be echoed by investors who have made submissions to this inquiry.

We cannot see that the rationale for reform has been established in the current legislative proposal. In the recent class action inquiry undertaken by the PJC, to which this legislation partially responds, much was made of the so-called explosion of security class actions in Australia. This is simply not borne out by the evidence. For instance, Professor Vince Morabito's 2019 research shows that from 1992 to 2019 only 63 companies or corporate groups had class actions filed against them on behalf of shareholders. His 2021 updating of this analysis shows a halving of securities class actions in the last two years when compared to the previous two years. This downward trend is consistent with the analysis by law firms Allens and King & Wood Mallesons, both of which have active practices in representing defendants in these cases.

The explanatory memorandum also addresses the issue of directors and officers liability insurance, its rising cost and decreasing availability and the role that securities class actions play in this regard. While Omni Bridgeway is no insurance sector expert, there is significant external evidence establishing the multiple causes of these market developments. Overall, our view on the continuous disclosure proposals is that they should be subject to further rigorous and independent scrutiny prior to their finalisation. I am happy to answer the committee's questions on these and other issues concerning the proposed continuous disclosure changes.

CHAIR: Thanks, Mr Saker. Senator Walsh.

Senator WALSH: Mr Saker, your submission raises concerns about the level of consultation with the draft legislation. You might have heard already this morning a level of discussion around the consultation process. As far as we are aware, there was no consultation on schedule 2 of this bill directly. Can I confirm that you have not been consulted by the government, the Treasurer or the department on the provisions of the bill?

Mr Saker : Yes, I can confirm that.

Senator WALSH: Is it your view that some level of consultation would have been warranted, given the significant changes contained in the legislation?

Mr Saker : It is our view that there should be further consultation and scrutiny by independent experts who can advise the government and the public in relation to the potential financial impacts of these proposed changes. The Australian capital markets are well regarded internationally and a significant portion of that, according to ASIC, is as a consequence of the existing laws in relation to both continuous disclosure and misleading and deceptive conduct.

Senator WALSH: You cited ASIC's statements in your opening statement and in your submission around the importance of continuous disclosure laws to the operation of our markets. Why do you think the laws as they stand today around continuous disclosure are so important for the successful operation of our markets? What are the major risks to the operation of our markets from this legislation?

Mr Saker : Unfortunately, we are not experts in relation to financial and capital markets, so it is difficult for us to express a view on those issues. I refer to the submissions made by ASIC to the ALRC as well as other submissions that have been made here as to the efficacy of the Australian capital markets and the high regard in which they are held internationally as a consequence of the strength of the existing laws.

Senator WALSH: The Australian Council of Superannuation Investors said about the temporary changes to continuous disclosure lawswhich the bill seeks to make permanentthat, while many directors and companies will seek to do the right thing, the inevitable reality is that, where laws are watered down, it opens the door for poor behaviour that undermines the integrity of the market. Do you agree that watering down the laws would open the door for poor behaviour in the market?

Mr Saker : We are making a significant shortcut statement in relation to these proposed changes. These changes are not just to continuous disclosure; they also impact on the important provisions relating to misleading and deceptive conduct. I appreciate that when these provisions were initially raised by the Treasurer it was in the context that it was making permanent what had been previously temporary changes to continuous disclosure, but it did expand significantly beyond just those amendments. My only response to your question is that the appropriate response to increasing evidence of breaches of law, which cause loss to Australian investorsthat is the mums and dads, the superannuation funds, and the self-managed funds that are intended to cover people's retirementis not to curtail people's ability to access law, especially when it is at the behest of foreign insurance companies and their clients.

Senator WALSH: I will go to some questions around the prevalence of shareholder class actions which you talked about in your opening statements and which, as we know, is the main reason the government has given for introducing this bill and making the changes in schedule 2. The government says that there is a need to protect Australian companies and directors from what they call 'opportunistic class actions'. The recent report on litigation funding by the Parliamentary Joint Committee, the PJC, on Corporations and Financial Services found that there were only 10 shareholder class actions in 2019. Can you comment, as you do in your submission, on the prevalence of shareholder class actions?

Mr Saker : There are two false narratives in relation to the basis for these proposed changes. One relates to this myth of an explosion in the number of shareholder class actions; the second relates to the increase in D&O insurance as a consequence of this mythical explosion. In relation to the prevalence of shareholder class actions, putting aside the very strong evidence of Professor Vince Morabito which was, to some extent, not accepted by the majority of the PJC, but acknowledged by the minority, the evidencewhich is now even more clear from defence side law firms such as Allens and King & Wood Mallesonsshows that there has been a decrease in the number of shareholder class actions, but not just this year; it is a three-year trend. It is not a one-year phenomenon. We have seen since 2017-18 the number of shareholder class actions decrease from 23. In 2018-19 that decreased to 17 and in 2019-20 that decreased to nine. This financial year there have been seven. So overall, 99.99 per cent of all listed companies in Australia have complied with their obligations in relation to both continuous disclosure and misleading and deceptive conduct.

Senator WALSH: Thank you. I appreciate you going through those numbers which, as you say, seem to show that shareholder class actions are becoming less common, not more common, over the past few years. Even if the number of shareholder class actions were increasing, it would not necessarily follow that there was a problem with the law, would it? There might be a problem with what is happening in terms of corporate behaviour and the need of shareholders to have some remedies? Is that right?

Mr Saker : From our perspective, the appropriate response here should not be a curtailment of people's access to law or access to justice through funded class actions. It would be to address the fundamental issue, which is compliance with these laws. Omni Bridgeway is a publicly listed company. It has been listed since 2001. I am intimately familiar with our obligations to both continuous disclosure and misleading and deceptive conduct. Over 99.9 per cent of companies listed on the Stock Exchange comply with their obligations. So it is not a difficult area that causes people to accidentally trip up, and therefore it does not require, in our view, significant adjustmentor any adjustment at all.

Senator WALSH: Your submission also goes to some of the arguments around the rising cost of director and officer insurance. There are some statements made by government that D&O insurance is increasing because of the risk of shareholder class actions. What are your views on those arguments?

Mr Saker : There is no doubt that D&O insurance costs have increased in recent years. I am aware of the false narrative that it is almost entirely attributable to the increase in shareholder class actions. However, the broader narrative, which is acknowledged even by those within the industry, including brokers and others, is that the costs have increased as a consequence of three key issues: one is chronic under-pricing that has occurred over the last decade in relation to D&O insurance, and that required some kind of reparation. The second relates to a general global trend in terms of hardening of insurance, and not just D&O insurance but insurance in general; specifically D&O insurance. The third issue is the increasing prevalence of detection of corporate misbehaviour through things such as the Hayne royal commission. D&O insurance doesn't just respond to shareholder class actions; D&O insurance responds to all forms of breaches of director' duties and obligations, including such things as insolvent trading.

Senator WALSH: In one of your answers before you expressed a concern about the extension of the temporary changes to continuous disclosure laws to include deceptive and misleading conduct as well in terms of adding the fault element. Can you elaborate on those concerns?

Mr Saker : Yes. When the government introduced the temporary changes in response to the COVID-19 crisis, which was a position that Omni Bridgeway supported at the time, we recognised that there were significant international concerns and a need to support the Australian industry. The government introduced changes as they related to continuous disclosure but did not touch the provisions as they related to misleading and deceptive conduct.

When the Treasurer announced the intention to permanently change these provisions, reference was only made in that announcement to the changes to continuous disclosure. Misleading and deceptive conduct wasn't mentioned. It wasn't until the actual act itself was made available that it became clear that it was to expand what was a temporary change into a more permanent change that affected both the continuous disclosure as well as the misleading and deceptive conduct provisions.

Senator WALSH: You've got a concern about the transparency there that you've just expressed, but do you also have a particular concern about the extra reach of the provisions and the potential effect of that extra reach into misleading and deceptive conduct?

Mr Saker : They're quite different provisions. Continuous disclosure is an obligation to make known material public information so that people can trade their shares. Misleading and deceptive conduct is a positive act by a director or an officer to otherwise not comply with their obligations to be transparent and open. I think the extension there raises both positive and negative aspects of corporate misbehaviour.

Senator WALSH: Those are most of my questions, Chair. We might go to Senator Brockman.

CHAIR: Thanks, Senator Walsh. Senator Brockman, did you have some questions?

Senator BROCKMAN: Thank you very much, Chair. Mr Saker, thank you for joining us from New York.

Mr Saker : Thank you.

Senator BROCKMAN: It's fair to say that most of the interest in these particular provisions has come from, I guess, the class action worldnot solely, but there has been a fair amount of interest from that space. Apart from the impact on the class action business model, is there a reason why these particular civil penalty provisions should be strict liability?

Mr Saker : I'm not aware of the extent to which other commentators have expressed views about the proposed changes. I'm certainly aware that Omni Bridgeway has concerns in relation to the basis for these proposed changes. As I mentioned in my earlier response, these proposed changes are driven on the false narrative of an explosion in shareholder class actions and a massive increase in D&O insurance as a consequence of that explosion. In my view, and as I mentioned in my opening statement, I just don't think that makes out the basis for the change, particularly in the context of the decreasing number of shareholder class actions over the last several years.

Senator BROCKMAN: I accept that's your position, but I'm trying to ask the question in a different way to see whether anyone has an answer to it. Why should these particular civil penalty provisions be on the basis of strict liability and not have a fault element? Admittedly, there are examples both ways, but other civil penalty provisions in the Corporations Act do have fault elements. Do you have a view on why these particular penalty provisions should be strict liability?

Mr Saker : As I mentioned in my opening statement, Omni Bridgeway is not an expert in relation to investment and financial markets. There are others that are much better qualified than us to provide this committee with expert insight into that particular issue. All I can refer to is the views of the corporate regulator which, amongst others, have the view that the existing provisions play an essential role in the ongoing success of Australia's financial markets. At the moment, nothing has been put forward that shows what the implications or consequences of these changes may be.

Senator BROCKMAN: Thank you very much. Thank you, Chair.

CHAIR: Thanks, Senator Brockman. Senator Walsh, did you have any additional questions?

Senator WALSH: No. The witness, Mr Saker, was very succinct in his comments. I might just ask, Mr Saker, whether you have any concluding remarks or any major part of your submission that you feel that we've missed that you wanted us to make sure was on the record in terms of concerns around the legislation or parts of the legislation that you support.

Mr Saker : It's a very open-ended question. I have expressed our views, I think, in relation to our concerns, which are based on the fact that it was driven by two bases that we think haven't been made out. One is the growth of shareholder class actions and the consequential cost to D&O. I'd perhaps just leave it at that. We believe they're obviously not correct or made out.

Senator WALSH: Thank you very much indeed for being with us.

CHAIR: Mr Saker, just a couple of questions from me. I believe the business largely started in Australia; is that correct?

Mr Saker : Yes. We commenced operations as a listed company in 2001. We were a listed company largely to promote transparency in what was at that stage a very new industry in Australia.

CHAIR: How has the company developed over that time? I gather you do a lot more work internationally now as well.

Mr Saker : That's correct. We have expanded those operations into North America, Europe, Asia and the Middle East. We have 18 offices around the world in 10 countries and a team of 180 people. We fund 300 pieces of litigation around the world, of which 13 are Australian class actions. Six of those are, in fact, securities class actions. As I may have mentioned, we've only commenced two in the last 2½ years which, as Australia's largest and most experienced litigation funder, I think only reinforces this position about how infrequent shareholder class actions actually are run in Australia.

CHAIR: Are there any international trends in terms of dealing with class actions, from a government point of view, that you've become aware of?

Mr Saker : I think each jurisdiction has tackled these issues on its own basis. Australia has recently introduced licensing and the requirement to conduct class actions as a managed investment scheme. These are both issues that we support. In fact, there are aspects of that that should be expanded, such as including the contingency fee in Victoria to ensure that they're also conducted in a similar type of manner on a licensed basis as a managed investment scheme. But, apart from that, there aren't any general international trends, no.

CHAIR: Thanks for that, Mr Saker. We appreciate you making time from New York to appear before us today.

Mr Saker : Thank you.