The Government has confirmed its intentions, summarised in a Ministry of Justice response in September 2017, to review the discount rate by introducing legislation into parliament. The Civil Liability Bill which also includes provisions relating to reform of the whiplash claims process, will now begin the process of parliamentary scrutiny. With this development, the uncertainties of when the process would start have been lifted. The new rate of minus 0.75%, introduced in March 2017, has been adding huge amounts to the higher value claims, often increasing them threefold.
The Government has chosen to adopt many of the Justice Select Committee’s (JSC) recommendations in its efforts to achieve a ‘fairer and better system’ based on a ‘100% compensation’ rule. In line with the Ministry of Justice’s expressed intentions in September 2017, the legislation proposes a new process for setting the discount rate which includes:
- a rate being set by reference to expected returns on a low risk portfolio of investments (rather than a ‘no risk’ portfolio);
- a rate being set by the Lord Chancellor following advice from an expert panel; and
- the rate being reviewed at minimum three year intervals.
The Bill makes provision for a court to take a different rate of return into account if a party to proceedings demonstrates that this would be appropriate in the particular case.
In the interests of transparency, when setting the rate, the Lord Chancellor will be required to publish:
- reasons for setting a particular rate;
- the expert panel’s report on which the decision was based; and
- an impact assessment.
In proceeding with the legislation, the Government has discounted the JSC’s concern that further evidence needed to be obtained before the basis for setting the rate was confirmed in legislation. Instead, it has confirmed that it will continue to gather evidence prior to the first review through a call for more evidence on investment behaviour, and by asking the Government Actuary’s Department to carry out further research into assumptions made on levels of inflation, taxation and management costs, and into the effect of a range of rates under a wider range of assumptions.
Other provisions in the legislation demonstrate that the Government has not completely lost sight of some of the options it asked for views on in its consultation on the rate in 2017. For example, the legislation makes it clear that the Lord Chancellor will have the ability to set different rates based on duration of injury or for different heads of loss.
In addition to the headline points set out above, the response to the JSC report also reveals the Government’s intentions in other related areas which have the potential to significantly affect defendants. This includes consideration of claimants being able to recover investment management charges, and of ways in which the number of settlements including periodical payment orders (PPOs) may be increased.
In relation to investment management charges, the Government accepts that this is a legal decision which cannot be made by the expert panel, but does imply that it is not content to leave this decision to the courts alone. It indicates that it will consider appointing a ‘third party’ to review this point.
Periodical payment orders
On PPOs the Government is convinced that there are advantages to be gained through using this mechanism particularly in relation to future losses. It does not currently understand why, in light of apparent enthusiasm from stakeholders, including some claimants’ representatives, the uptake of these is so low. While it does not propose changing the law at present, it intends to investigate the ‘quality and effectiveness’ of the advice being offered to claimants and consider whether measures can be taken to make them more attractive. It leaves open the possibility of the law being amended at a later date, and also intends to either provide or endorse guidance on standard PPO practice to ensure that claimants are properly informed about these.
When will any new rate be set?
The response states that the first review should begin promptly after the legislation is enacted but does not consider that the specified periods for the conduct of the reviews can sensibly be reduced. The rate change is not going to be immediate and the best suggestion is before the end of the year (hopefully in the autumn) but this may stretch into 2019 depending on how long the legislation takes to make its way through parliament. While the Bill makes provision for periodical reviews, the exact timing of reviews and the implementation of any change in the rate will be left to the Lord Chancellor of the day.