Discount rate provisions of Civil Liability Bill unchanged Bill after Lords Committee stage

Peers spent around four hours on Wednesday 15 May debating the new approach in the Bill to setting the personal injury discount rate which, in summary, is (a) that the link between the rate and returns on Index-Linked Gilts is scrapped and (b) that a timed-limited and detailed procedure of advice from an expert panel and a decision by the Lord Chancellor is put in place. As would be expected at this stage, no amendments were voted on but several key issues nevertheless remain live for further discussion at Report Stage. We expect that might take place next month, after the short end of May recess.

The early part of this second day’s debate on the Bill focused on periodical payment orders (PPOs) and the possibility of making their use more widespread. There was clear recognition across the House of the real benefits of PPOs for claimants, in appropriate cases. One speaker captured the mood well in referring to the need to for “a gentle nudge in the direction of PPOs”, although others felt more of a “shove” might be necessary. Justice Minister Lord Keen closed the debate on PPOs by confirming that the Government intends to:

  • refresh the guidance to claimants in respect of PPOs and make that available by the end of 2018 year, and to
  • complete work, by summer 2019, on the effectiveness of advice around the lump sum versus PPO choice and on other ways in which the use of PPOs could be increased [this second element appears to be yet further indication that the Government intends to set a new discount rate during the second half of 2019.]

He also was very clear that the Government is not at all minded to provide for reviewable PPOs, given the real problems those would cause for insurers’ reserving and capital provisions.

Lord Faulks spoke to a novel amendment by which he was attempting to allow the courts to use a higher discount rate than the prescribed rate if a claimant had refused a reasonable offer of a PPO. His argument was that such a refusal indicated that the claimant was prepared to accept greater investment risk or, in his more elegant formulation, “has evinced an intention to be rather more adventurous than the legislation presumes that he will be.” The Ministry of Justice (MoJ) had asked a specific question on this point in its 2017 consultation. Nothing about it this appeared in the MoJ’s post-consultation response in September, which suggests that the Government does not support it.

As regards split rates – ie the possibility in the Bill of setting “different rates of return for different classes of case”, at section 1(2) – Lord Faulks pondered whether that covered “different types of loss in the same case”? Lord Kinnoull added that “the word ‘classes’ to an insurance-based person like me … means things like motor insurance, medical negligence or employer’s liability [and he wanted to ensure] that the Lord Chancellor could set differential rates for something wider than classes, according to my meaning of classes: on the basis of the number of years of future needs, thereby following the successful Hong Kong and Ontario discount rate regimes.”

Baroness Vere replied for the Government on this point. She pointed out while a majority of respondents to the MoJ consultation were in favour of 1(2), the Government believes that “it is desirable for the Lord Chancellor to set a rate that is generally applicable and is not constantly called into question in individual cases.”  It should be noted that her uase here of “a rate” would seem strongly to imply that Ministers are minded to set a single discount rate when using the new powers for the first time. She went on to dismiss the “different classes of case” point on the grounds that the new section “already prescribes that the Lord Chancellor may distinguish between classes of case by reference to, among other things, the description of future pecuniary loss involved and the length of the period during which future pecuniary loss is expected to occur.”

As we have noted in earlier blogs, a wide and fairly uncoordinated range of amendments sought to foreshorten the periods set out in the Bill in which the rate review is to be carried out. For ease of reference, those periods are summarised in the graphic below.

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These periods were defended vigorously by Ministers. The overall 180 days was realistic and within that the 90 days for the expert panel to carry out its work was “a challenging but reasonable timetable”. Lord Keen re-emphasised that the Government aims to move as swiftly as it can while ensuring that “any review is completed fully and properly and is not going to be the subject of untoward challenge.” The latter part of this phrase is a clear reference to the prospect of judicial review, which he mentioned in terms on several occasions during this debate.

If Lord Keen was not for moving on the periods, he at least provided a little further clarification as regards the expert panel. He confirmed that it cannot undertake any work before the Bill is commenced (which has to be correct, given that it takes its powers from the Bill). He also confirmed that the Government intends “to publish the draft terms of reference for the expert panel in time for the Report stage of the Bill in this House”. This raises two points: first, that these terms of reference (TOR) should emerge soon – probably next month – and second that these appear to be the substantive TOR for the actual work and remit of the expert panel and not merely the TOR for appointing its members (which are largely found in the Bill in any event).

In something of a twist, he resisted an amendment to remove the expert panel from the first rate-setting process. Although that had been the MoJ’s initial post-consultation proposal, it had since changed tack and had included the panel in the first rate review following concerns raised by the Justice Select Committee. What he actually said was that dispensing with the panel for the first review “might offer a sensible way to bring the new and fairer basis for setting the rate into operation more quickly [but that] the Government believe that the panel ought, if practicable, to be involved.” The qualifier “if practicable” probably allows just sufficient ‘wriggle room’ should the Government decide at a later stage to revert to its initial proposal.

Two final points arose. First, that Ministers explained that the three year cycle for future reviews of the discount rate was a compromise and they look unlikely to move on that.

Second is that the Bill obliges the Lord Chancellor when setting the rate to make such allowance for investment management costs as he thinks appropriate. Ministers explained that this was included because under current law the cost of investment advice is not recoverable as a head of damages. Dealing with it as part of the rate-setting process should avoid the lengthy and costly disputes that would inevitably follow if this was a recoverable head of loss assessed on a multiplier/multiplicand basis in each and every claim. From the compensator perspective at very least, baking it into the discount rate in this way appears to be the preferable approach – albeit that the critical and so-far-unknown element is how many basis points might be allowed for this element?

We expect the Report Stage debate will take place some time in June and will provide further commentary when it does.

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