Class action litigation funders will come under increased regulatory scrutiny following a Federal Government decision requiring that they hold an Australian Financial Services Licence.

Treasurer Josh Frydenberg says a removal of exemptions, to take effect from late August, will also require funders to comply with the managed investment scheme regime.

The changes ensure litigation funders face the same scrutiny and accountability as other financial services and products under the Corporations Act, he says.

The Insurance Council of Australia has previously argued that litigation funders should come under a licensing regime and also be subject to some form of capital adequacy requirement.

“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,” spokesman Campbell Fuller said.

The Federal Government earlier this month referred an inquiry into litigation funding and the regulation of class actions to the Parliamentary Joint Committee on Corporations and Financial Services. A report will be released by December 7.

The Association of Litigation Funders of Australia says the Australian Law Reform Commission and Australian Securities and Investments Commission have pointed to the courts as best placed to regulate funders and oversee claims and their 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,” it says.

Litigation funders have been blamed for fuelling a rise in class actions, particularly against listed companies, leading to soaring premiums for directors’ and officers’ cover.