Australians love a good stoush, and the launch of a class action against Australian banks for illegally pocketing fees has all the hallmarks of public sport.

Globally the banks are the reviled architects of the global financial crisis, while locally they’ve been under the gun for raising their mortgage rates in excess of Reserve Bank settings. Should the class action prevail, most will regard it as a belated payback.

The case looms as one of the largest class actions in Australian corporate history. Financial Redress, the company set up by litigation funder IMF (Australia) is seeking up to $5 billion in illegal fees and is predicting 500,000 people will heed the call to join.

Newspaper publicity is helping the recruitment drive by pointing people to the Financial Redress website, which alludes to a big pay day should the case succeed.

Joining and winning a class action never seemed so easy, but the banks aren’t the only financial services sector shivering at the implications.

Firstly, class actions are on the rise in Australia; last year six class actions were launched, five the year before that, and three in 2007. That’s nearly the same number of class actions launched in three years than the preceding 14.

True, numbers are rising off a small base, but of the 29 brought since class actions were permitted in 1992, 15 have been against financial and insurance companies.

Secondly, once changes to the Corporations Act are introduced into Parliament to clarify funded class actions as separate from managed investment schemes, more class actions are set to go ahead.

So what has driven this growth in funded class actions? Simply, investment dollars.

Before 2005, the participants funded the majority of class actions. For families, small businesses and individuals, the risk of losing the case and along with it their assets, was simply too great.

The emergence of the litigation funder has been the game-changer. IMF, the largest litigation funder in Australia, was set up in 2001 and was mostly involved with insolvency-related cases. In 2004 it took on its first class action and has since made a healthy return by offering no risk, some reward to aggrieved citizens.

Economic consulting group Nera says companies like IMF have opened the doors to litigation where legislative changes alone did not.

“We think that the most likely trend is that the rate of growth in filings evident in recent years will continue,” Director Greg Houston says.

However, recent publicity over the case and an upward trend in class actions shouldn’t be seen as a strong indication that insurers – always a target for abuse – are the next bullet in the litigation chamber.

According to major litigation law firm Slater & Gordon, the economics involved in class actions involving things like confusing flood coverage work differently from those involving excessive fees.

“I don’t see anything that would increase the prospect [of insurance class actions],” James Higgins, Head of the firm’s Victorian commercial and project litigation division, told insuranceNEWS.com.au.

However, there’s a small case brewing in the town of Roma in central Queensland that insurers should keep on their radar screens.

Peter Long, the Practice Group Leader and class action specialist at Slater & Gordon, is meeting with a group of homeowners from the town this Wednesday. They represent 100 residents whose claims were denied when their homes flooded in March.

The meeting will determine if a case exists to pursue those insurers, including Allianz and Elders, for an estimated $6 million in damages.

While the amount sought pales in comparison to the bank fees case, it does set a new precedent. If pursued, it would be the first time a class action has been launched against an insurer for citing flood exclusions.

Mr Long says any failure on the part of insurers to clearly state what is covered before a policy is signed may work in the claimants’ favour.

“If an insurer drafts a policy that is ambiguous, the law dictates the policy must be interpreted in favour of the person to whom the policy was provided,” he told insuranceNEWS.com.au.

“It is absolutely critical that insurers inform people up-front of what is excluded.

“My understanding is most people when they apply for insurance are not shown the policy – it arrives in the mail some four to eight weeks later.”

The road towards a class action in this case would be incredibly complex. Not only will any case have to contend with multiple insurers, it must also factor in multiple contracts, exclusions and clauses. There isn’t a one-size-fits-all approach.

“It’s impossible to have one class action against all of the involved insurers,” Mr Long said.  “We may have a series of class actions where each respondent is a different insurer.”

Any class action could also be months or even years away as Mr Long combs over policy details and formulates a plan of attack.

The insurance industry has cleaned up its consumer act over the past 20 years, but it’s still not perfect. The bank fees class action is a phenomenon – but smaller-scale class actions could well become a regular irritant.