Litigation funders will be required to hold an Australian Financial Services Licence, stepping up regulation of a sector blamed for fuelling class action activity and directors’ and officers’ insurance premium increases.

Treasurer Josh Frydenberg says removing the licence exemption funders have operated under will ensure they are covered by Corporations Act obligations to act honestly, efficiently and fairly. They will also be required to comply with the managed investment scheme regime.

“The Morrison Government is committed to ensuring that litigation funders in Australia operate transparently, are appropriately regulated and accountable,” he said today.

Funders have been criticised for the percentage of legal settlements they take, while class actions against listed companies have contributed to D&O premiums surging in recent years.

Some listed companies experienced rate increases of more than 100% for cover in the March quarter, latest figures from Marsh show.

The Insurance Council of Australia (ICA) welcomed the move, with spokesman Campbell Fuller saying closer regulatory scrutiny of litigation funders “is a welcome step towards providing appropriate protection for all parties to class action litigation, including defendants and insurers”.

ICA has also pushed for litigation funders to be subject to some form of capital adequacy regime, and says regulations requiring compliance with the managed investment scheme regime are in line with that approach.

The licensing requirement, to take effect three months from today, comes as the sector faces further scrutiny through a parliamentary committee inquiry launched this month into litigation funding and class action regulation.

The Parliamentary Joint Committee on Financial Services and Corporations has called for submissions after the inquiry was delayed from earlier this year due to the coronavirus outbreak, and will report by December 7.

Class actions and litigation funding have already been reviewed by the Australian Law Reform Commission (ALRC), which tabled a report in January last year, while a Victorian review and the Productivity Commission have also examined the legal regime.

The Association of Litigation Funders of Australia (ALFA) says it is “surprised” by the Government’s decision given the ALRC and Australian Securities and Investments Commission have pointed to the courts as best placed to regulate funders and oversee claims and costs.

“These important issues should be properly ventilated and debated by all stakeholders and not dictated by the power being brought to bear on politicians by entities representing the interests of corporate Australia and the insurance industry,” ALFA said.

The group says it’s disappointed the Government had not responded to previous reports “in any meaningful way” before embarking on the parliamentary inquiry and announcing the licensing changes.