The Australian Parliament building in Canberra/photo by Shutterstock.com

An inquiry by Australia's Parliament into litigation funding and class actions will examine the impact of class actions on the economy and vulnerable businesses already suffering the impact of the COVID-19 pandemic.

The government's plan to launch the inquiry, dubbed Litigation funding and the regulation of the class action industry, comes after calls by business leaders and business groups to regulate litigation funding and class actions amid claims businesses are being unfairly targeted.

According to the terms of reference, the inquiry will examine "whether the present level of regulation applying to Australia's growing class action industry is impacting fair and equitable outcomes for plaintiffs."

It will examine fees, costs and commissions earned by litigation funders and the impact of litigation funding on the damages and other compensation received by class members in class actions.

The financial and organizational relationship between funders and plaintiffs lawyers will also come under the microscope, "with a focus on whether these relationships have the capacity to impact on plaintiff lawyers' duties to their clients."

The inquiry, which will be run by lawmakers from a range of political parties, will also examine the effects of class actions on the economy and "the potential impact of Australia's current class action industry on vulnerable Australian business already suffering the impacts of the COVID-19 pandemic."

The Victoria government is planning to allow lawyers in that state to take contingency fees and the inquiry will consider "whether this could lead to less financially viable outcomes for plaintiffs."

The inquiry by the Parliamentary Joint Committee on Corporations and Financial Services is to report by Dec. 7.

"Justice is not a business and the primary focus of those who work in the legal system should always be on getting the best outcomes for their clients, not on maximizing returns for hungry shareholders," Attorney-General Christian Porter said when he announced the date of the inquiry.

"I hope this inquiry will generate useful insights that will enable us to develop policies that will ensure the interests of Australians are better protected," he said.

Business groups want litigation funders to be regulated, arguing that class actions make it more difficult for businesses to operate.

"The inquiry needs to investigate the outrageous levels of returns that litigation funders (many of which are overseas firms) are receiving from class actions in Australia, to the detriment of plaintiffs, businesses and the broader community," Innes Willox, chief executive of the national employer association Ai Group, said in a statement.

"Litigation funders offer financial products to investors yet they are not subject to the regulations that apply to other providers of financial products. This is wrong and it needs to be addressed," Willox said.