The Productivity Commission says restrictions on lawyers offering claimants damages-based billing should be removed, to promote access to justice.

The approach – in which lawyers are paid a share of the amount recovered – is banned in Australia over concerns it creates “perverse incentives”.

However, the commission’s Access to Justice Arrangements report says the risks are no worse than other forms of billing.

Law firm Maurice Blackburn has welcomed the recommendation and urged the Government to act.

“This report could well provide the blueprint for the next phase of the evolution of class actions, and see a greater balancing of the scales of justice,” Principal and National Head of Class Actions Andrew Watson said.

“Damages-based fees will increase access to justice and improve competition, delivering benefits to consumers.”

The commission also supports the growth of third-party litigation funders, despite opponents arguing they facilitate unmeritorious claims and take advantage of plaintiffs.

“Litigation funding can promote access to justice by providing finance for the prosecution of genuine claims by plaintiffs who would otherwise lack the resources to proceed,” it says.

The report says litigation funding has levelled the playing field, providing a similar service for plaintiffs as insurance does for defendants.

However, the commission concedes consumers need protection and assurance that funders will follow through on financial promises.

“Therefore, in addition to oversight by courts, funders need to be licensed to ensure they hold adequate capital to manage their financial obligations.”

International law firm Allens supports the commission’s approach.

“The recommendation for greater regulation and oversight of third party litigation funding is welcomed,” it said. “Appropriate regulation of litigation funding will promote transparency, minimise conflicts of interest and protect the interests of consumers.”