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Economics References Committee
Treasury Laws Amendment (2021 Measures No.1) Bill 2021, Provisions

WALKER, Mr John, Chairman, Association of Litigation Funders of Australia; and Chief Executive Officer, Investor Claim Partner Pty Ltd


CHAIR: Welcome. I see you wear a couple hats, Mr Walker.

Mr Walker : I do.

CHAIR: Very good. 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. I advise witnesses that answers to questions on notice should be sent to the secretariat by 5:30 pm on Wednesday 16 June. Do you wish to make an opening statement?

Mr Walker : I do. I thank the Economics References Committee for the opportunity to speak today. I also ask the committee to be under no misapprehension that schedule 2 to the bill in question seeks to usher in fundamental changes to our primary market protection laws—changes that could have materially detrimental consequences. The continuous disclosure component of the change was ushered in under the cloak of the COVID pandemic, and now the misleading and deceptive conduct component has been proposed, all without consultation and, in particular, without the thorough investigation proposed by the ALRC into the relevant evidence to ground any changes to our market protection laws in informed policy.

In my respectful opinion, there is simply insufficient evidence of the potential costs and benefits that will flow from this bill to change the balance in public and private policing of corporate conduct that has been built up over the decades that our market protection laws have been in place. One thing is certain, and that is that enforcement of these laws will diminish—which is unashamedly the primary motivator behind the proponents of the bill. In order to get a picture of the potential unintended consequences, I think it's apt to use the analogy of a street cop policing speeding laws that are designed to keep people safe. If you introduced an obligation on police to prove a speeding driver was negligent or reckless, there would be a tendency for four things to happen. First, the cost and time and risk of failure involved in court prosecutions would increase. Second, the police would police speeding laws less. Third, drivers would drive faster. Fourth and finally, there would be more accidents.

We have strict liability laws for a purpose. No-one, including the bill's proponents, has questioned the benefits derived from the strict liability market protection laws that this inquiry is addressing. The laws have been working well to achieve their designed benefits, these being the enhancement of confidence and informed participation by investors in secondary securities markets, thereby delivering greater market depth, liquidity and efficiency. The central question for this inquiry is not about enforcement. The central question, which, unfortunately and with respect, will not be answered in this committee's report, is: what effect would the proposed bill have on our markets and the millions of Australians that invest in them?

The 60-odd completed shareholder claims have caused about $2½ billion dollars to be paid to shareholders, which is dwarfed by the $40-odd billion drop in market capitalisation of those 60 companies after they provided corrective disclosure. The $40 billion is also likely to be the tip of the iceberg—as are drivers fined for speeding. Add to this the deterrent effect acknowledged by ASIC and evidenced in academic literature and you can start to get a sense of the magnitude of the potential quantitative downside to passing this bill. The potential qualitative downsides include the following: a decrease in timely and equal access to materially price-sensitive information; secondly, a decrease in confidence in the market and informed participation; and, thirdly, a decrease in market depth, market liquidity and market efficiency. The potential downsides also include an increase in volatility, and an increase in insider trading.

Without an inquiry to provide a sound evidence basis for Corporation Act reforms, as called for by the ALRC, we could run the risk of diminished capital supply and of the capital provided being at a higher cost and being misallocated in an uninformed and inefficient market, all for the relatively small and questionable objective of fewer class actions. Thank you.

CHAIR: Thanks, Mr Walker. I'll hand it to Senator McAllister to start.

Senator McALLISTER: Thanks very much, Mr Walker. I attempted to take notes as you were talking through the quantitative impacts. I wonder if we can revisit that. The title of your submission refers to the idea that the potential downside dwarfs the potential upside. I think that's a distinctive feature of the submission you're making to the committee. Can we just talk about that a little more?

Mr Walker : Yes, this is an economics references committee. I'm not an economist but I do have a reasonable understanding of these laws and their application. When looking at the policy considerations behind these laws, they're far greater than what has been the focus of the perceived benefits from the bill. We look at the bill with reference to its application to the Corporations Act, which is a far broader issue. It involves our markets, the integrity of those markets and the confidence we have in those markets—'we' being the seven-odd million Australian individuals, together with their superannuation funds et cetera. When you look at it from that perspective, the actual benefit that's being sought here is to free up some management time and take away a focus from the defence of these attacks. That's the primary benefit that they see from the bill. I just look at the potential downside of this and see fewer claims, less enforcement and the potential downsides for the market. The market is obviously far greater than the activities of the one or two per cent of the directors that control market participants. I think in this inquiry we just need to keep that in perspective.

Senator McALLISTER: Talking about the integrity and confidence in Australian markets—and I accept that I'm inviting a qualitative observation—how significant do you think these continuous disclosure arrangements and the broader Australian architecture are in attracting investment into the Australian environment?

Mr Walker : I think it's critical. We've created an environment whereby we have globally almost the highest investor participation from individuals. That comes through a belief that the market is acting with integrity, so people are prepared to put their capital in. It's not just the locals. Very recently, over the last 10 years, we've also had a very large increase in overseas capital coming to our markets. So the supply and the price at which that capital is supplied are very much dependent upon the belief in the market that we are getting value for money, that the information in the market is full and complete in regard to the securities that are being chosen and that we're not allocating money to companies that ought not be provided with the capital and certainly at the price that it's being provided at. So these laws seek to ensure that we get enough capital, we get it at good prices and it's allocated in an appropriate way.

Senator McALLISTER: There has been some argument from proponents of schedule 2 that changes to these laws will bring Australia into line with other foreign jurisdictions. There's actually some dispute about whether that is in fact the case, but let's assume that that is true. Should we accept the assumption made by some submitters that there is a virtue in having Australia changed to be consistent with, for example, the United States?

Mr Walker : It's very difficult. Comparable laws, jurisdictions and the manner in which they're enforced are very difficult to compare. You can look at countries like Hong Kong, Canada and South Africa, who do not have fault elements in their securities laws. I think picking two jurisdictions and looking at the differences associated with them doesn't really add much to the debate. We created our misleading and deceptive conduct laws 50-odd years ago and our continuous disclosure laws 30-odd years ago. To seek to change fundamentally the way in which they operate without consultation, to me, is a very, very strange phenomenon, to say the least.

Senator McALLISTER: On that question of consultation, Treasury has advised us that they were not engaged in consulting bodies about the permanent changes that are proposed in this bill. Has your organisation been consulted either about the temporary changes that were made last year or these permanent changes?

Mr Walker : No, and nor am I aware of any others that have been consulted, other than I heard yesterday that the Group of 100 were.

Senator McALLISTER: On this question about the attractiveness of the Australian market for investors, ASIC reportedly told Treasury, prior to the temporary changes last year, that the laws are working well, that they are a fundamental tenet of our markets, that they're particularly important at a time of uncertainty and that the economic significance of fair and efficient capital markets dwarfs any exposure to class action damages. I assume you agree with that advice that's been provided by ASIC?

Mr Walker : That's the central tenet of my point.

Senator McALLISTER: Do you have any information about why the government has chosen to diverge from the advice that's been provided to them by the corporate regulator?

Mr Walker : No, I don't. I'm assuming that there have been interested parties lobbying and that a portion of the parliament has an interest in achieving certain objectives. I'm unaware of motivations and conduct.

Senator McALLISTER: Your organisation, as I understand it, partners with people who are bringing class actions and provides some of the financing that's necessary in the early phase of that. Is that a correct understanding of what you and your members do?

Mr Walker : Yes, Senator.

Senator McALLISTER: Obviously, in bringing forward these changes, the government has characterised such actions as opportunistic. For myself, I'm not clear what evidence they rely upon to suggest that these claims are opportunistic. Having worked, I assume, with a number of different parties, do you have a view about whether or not it is fair and reasonable to characterise these interventions as opportunistic?

Mr Walker : I have a distinct view that litigation funders do not place money as an investment into an asset class called causes of action, where there are winners and losers, and when you lose, you lose all your money and you pay the other side's costs. Those funders do not go into those claims in an opportunistic way. They provide finance to enable an asset to be liquidated, they often get it wrong and they often get it right. The price reflects the risk associated with it. You can't always be certain as to the outcome, but, just like any other investment market, the money is seeking a home in which it can achieve a return on investment and also at the same time facilitate access to justice.

Senator McALLISTER: What do you think the government means when they say 'opportunistic'? What are they actually referring to?

Mr Walker : I don't know; I think you need to ask them. I'm assuming that it's a derogatory term, or used in a derogatory way to say that the fund finance industry is taking advantage of an opportunity in an inappropriate way.

Senator McALLISTER: Yes, I think 'in an inappropriate way' is the key part of the characterisation, isn't it, Mr Walker? In other environments people might make reference to vexatious or frivolous claims. Are you aware of any evidence that indicates that there is a preponderance of vexatious or frivolous claims in actions?

Mr Walker : Again, to my knowledge, I'm not aware of any vexatious or frivolous claims. There are claims that have been taken that ought not to have been taken, because as it turns out the asset was not as valuable as what was thought at the start. But the money is not invested to achieve any objective other than to maximise the return of capital. So it's in no funder's interest to fund anything that's frivolous or vexatious.

Senator McALLISTER: There are costs associated with the parties that do engage in frivolous and vexatious behaviour, are there not?

Mr Walker : If it happened, yes. You'd lose the case, you'd pay the other side's costs, and you wouldn't be in the market for very long.

Senator PATRICK: In relation to schedule 1, do you have any particular views as to whether there are difficulties with that schedule—whether it's, on balance, reasonable, and whether or not it's a very good idea?

Mr Walker : No. The submissions put forward are solely focussed in regard to schedule 2.

Senator PATRICK: Which is why I was wondering whether or not you had a view on schedule 1 at all.

Mr Walker : No.

Senator PATRICK: Senator McAllister addressed one of my questions in relation to schedule 2 in terms of comparison with the United States and the UK, so I'll go to my second question. Perhaps noting the organisation you lead, can you talk to me about the difficulties that might be encountered in establishing mental state and perhaps even describe how that would be achieved in bringing a prosecution to a courtroom?

Mr Walker : Yes. What's proposed by the bill is to add a mental element to the cause of action. So not only will you need to prove the misleading and deceptive conduct—for example, looking at 1041—but you will also need to prove that the mental state of the directors and, by attribution, the company in conducting themselves in a misleading and deceptive way. So it's an additional element, and it is as ASIC and prosecutors in criminal matters find all the time: the actual mens rea component—the state of mind of the individual—and seeking to get our civil justice system, our adversarial process, to be able to identify, articulate and prove that mental element is often very difficult. That is why, in my view, if these laws are passed, the amount of class actions seeking to enforce these two provisions will materially decrease. It happens in two ways. One is the risks associated with not being able to prove before you commence proceedings. So a lot of claims that potentially have had conduct that was misleading and deceptive, recklessly or negligently, would just not go forward; a claim would not be filed. Even when you do take the risk of commencing the proceeding, you've then got the possibility of being able to prove, either through documents or through oral testimony at trial, the state of mind of the individuals involved. And so not only do you have risks before commencement of proceedings; you also have material costs and time involved in getting to the stage where you can actually know whether or not you're going to prove your claim. From my experience of being a lawyer for 10 years and a funder for 20 years, if you add this mental element to these two sections in the Corporations Act, then you will gut their capacity to assist in the policy considerations under the Corporations Act—namely, to provide compensation and to deter this type of conduct.

Senator PATRICK: That's helpful, but I just wonder if you could go to and help me as a nonlawyer in the sorts of things that would be necessary to show a court as to that mens rea.

Mr Walker : Taking the misleading and deceptive conduct provision, you will not only need to prove that the conduct was misleading and deceptive; you're going to need to prove that the conduct was either reckless or negligent—in other words, that the state of mind of the individual was such that, in conducting themselves in that way, they didn't care. They either didn't care about the truth or otherwise of their representations or didn't care as to whether they ought to disclose or not, or they were reckless in the way in which they did that. A strict liability-type obligation is there not so much to focus on the individuals but to focus on the effect of the conduct—that's the policy consideration behind the current law, and that's why, I think, it has had a capacity to be able to assist in the implementation of the policy considerations. If you bring in this mental element, a lot fewer claims will proceed, and a lot fewer claims will be successful.

Senator PATRICK: If you cast your mind back over the 20 years, I think you said, of litigation funding and the cases that you might have brought in relation to these particular sorts of offences, would you be able to identify which ones may not have proceeded or perhaps, more relevantly, the ones of those that were that were successful that may not have been successful had these sorts of laws been in place?

Mr Walker : I've probably been involved in 10 or 12 of the 60-odd that have concluded to date. I don't think we would have had evidence of the mental element in any of those claims prior to filing any of those claims. It's not usual for companies to disclose in a public way evidence of that nature.

Senator PATRICK: That means that you would have to somehow seek that evidence through a discovery process, which I presume means you would already need to have at least partially committed to the prospect of litigation.

Mr Walker : You've got to sign off on the pleadings, so you've basically got to say that you have a good cause of action. This is a publicly funded civil justice system, so everybody pays for it and we don't want claims that we don't think we're going to win and have proof of before we start. Once you increase the hurdle before you commence—I wouldn't say there wouldn't be any proceedings; I'm simply saying I can't recall any of those proceedings where we had evidence of the mental element. If the law does change, then there will be cases where we try to look further to see if we can justify placing capital into this space. But, like ASIC, which is the public policeman, where we assist in private enforcement, it will become very difficult.

Senator PATRICK: Thank you very much, Mr Walker. That's really helpful. On average every year how many prosecution would occur in relation to a continuous disclosure-type offence? Is it common? Is it rare?

Mr Walker : As I've said, there are 60-odd that have concluded since 1994.

Senator PATRICK: I thought you meant they were class actions. I'm not even including class actions. Did I get that wrong?

Mr Walker : Not including class actions? I'm not certain. I don't know of the numbers associated with private enforcement by individual investors against companies. It is just very difficult for individuals to be involved in enforcing those laws. As it stands, these laws really can't be enforced against companies with market caps below $100-odd million. So, although we have laws that are relevant to all of the ASX listed companies, it's only at a stage where the civil justice system enables enforcement that the laws can be enforced. If this bill passes, it will just be another barrier.

Senator PATRICK: Just to go back to your evidence, you said 60 over how many years?

Mr Walker : Basically since the class action regime started in 1994.

Senator PATRICK: Thank you very much.

CHAIR: Mr Walker, just trying to clarify that: the 60 cases you're referring to are class actions?

Mr Walker : Yes.

CHAIR: Okay. How many of those have settled outside of court?

Mr Walker : They've all settled in the court process. But, of the total, I understand that there are only two or three that have gone to hearing and concluded by judgement.

CHAIR: Just thinking about the optics of that, do you think that that is something that is a problem from a public perception point of view, in terms of these things don't reach their final legal conclusion in the sense of going to court, that therefore they can be painted as frivolous or not as serious as other issues?

Mr Walker : Well, I don't see that. I understand that the rule of law needs judgements, but our adversarial process is also a process, and courts seek to have parties resolve their own disputes. This, at the end of the day, is a private enforcement of the law, and therefore the interests of the group members are first and foremost. Funders and lawyers are agents of those group members. So it's in those group members' interests to try and create as much certainty as possible and maximise settlement proceeds. I understand concerns that public money is being used in the civil justice system to fund it, where judgements aren't always the norm. But in my experience each of those proceedings that have settled have resolved the claims in a manner which is in the interests of group members.

CHAIR: We heard some evidence yesterday from Mr Saker, from Omni Bridgeway, which I found quite interesting. I'm just interested in the decisions that you make about whether you back a case, for lack of a better word. I imagine you've had some thought about, if this were to become law, how you would deal with that decision-making process within your organisation. How would it differ, I suppose?

Mr Walker : More lengthy, time consuming and costly. It would necessarily involve a forensic inquiry into all the documents and materials around the issue of either the issuance of the securities or disclosures or nondisclosures in regard to the secondary markets. As I said before, the vast bulk of those claims won't see the light of day, or the ones that do will become more risky and therefore potentially settled at lesser amounts, so the compensatory component is just going to be more difficult than it is currently.

CHAIR: Thanks very much for your evidence, Mr Walker.