The Federal Court is to be given power to approve litigation funding arrangements, under changes included in a Treasury consultation paper on litigation funding schemes.

The consultation paper is a response to recommendations of a report of the Parliamentary Joint Committee on Corporations and Financial Services, which found that greater oversight of the sector is required

The committee report said there is systemic and inappropriate skewing of successful class action proceeds in favour of litigation funders, at the expense of class members. It said the proportion of proceeds going to funders is often disproportionate to the cost and the risk undertaken.

Changes outlined in the consultation paper are designed to guarantee a minimum return to class members dealing with litigation funders.

The government has taken up the committee’s recommendations that the Federal Court must approve a litigation funding agreement in order for it to be enforceable and that the court be given power to reject or vary the terms of an agreement.

The consultation paper said reforms should also include a “graduated approach to class member returns”, taking the risk, complexity and length of proceedings into account. The outcome would be that class members get more of the proceeds in less complex cases.

The current government has pursued a policy of regulating litigation funders. Last year, it announced that they would be required to hold an Australian Financial Services Licences and that their funding arrangements would be regulated as managed investment schemes.