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MoJ Consultation: The Discount Rate - review of the legal framework

Following its August 2012 consultation which was concerned solely with how the discount rate should be set under the present law, the Ministry of Justice has this week published a second consultation addressing the question of whether the law should be changed.

Background

Following its August 2012 consultation which was concerned solely with how the discount rate should be set under the present law, the Ministry of Justice has this week published a second consultation addressing the question of whether the law should be changed. It looks at two main issues:

  • Whether the legal parameters governing the way in which the discount rate is currently calculated under s.1 Damages Act 1996 should be changed so that the rate can be set by reference to higher risk investments. This would produce a higher discount rate and would be expected to produce lower lump sum awards than under the present law.
  • Given the potential problems with the long term adequacy of lump sum awards, whether there is a case for encouraging greater use of periodical payment orders (PPOs) in England, Wales and Northern Ireland, and for reviewing the system in Scotland which limits their use to circumstances where both parties agree.

Philip D'Netto and Simon Denyer provide a guide to the key points of the consultation and emphasise the importance of both sides engaging in the response process.

Comment

  • For as long as the principle of full compensation remains intact, the aim should be to achieve full compensation as closely as possible. This means ensuring that claimants are not over-compensated, as much as ensuring that they do not go under-compensated. The time that the Government is taking to look at the issue of the appropriate discount rate should be welcomed.
  • It seems a long time ago that APIL were threatening a judicial review on this issue when the Lord Chancellor was, as APIL saw it, slow to react to falling returns from what they believed to be the only vehicle that claimants should be required to use, ILGS. At the time, it seemed that the discount rate could only be reduced because of those factors. The lengthy process that has been followed has allowed other voices to be heard. It has become clear that in practice claimants do not invest in ILGS nor would an IFA advise them to do so. Furthermore carers' earnings do not always outstrip inflation as some experts have suggested; the ASHE figures for 2011 and 2012 are lower than the equivalent figures in 2010.The Government's new approach as evidenced here is to try to look at what happens in practice, which is surely a wise course of action when the aim is to avoid under-compensating or over-compensating.
  • APIL and their members, and indeed other parties where the information is known to them, now have the chance of responding to this consultation and demonstrating what in fact happens in practice with claimants' damages and the rates of returns which they earn. If claimants are in fact being under-compensated, then the Government is giving APIL the chance to prove that. It remains to be seen whether the Office of the Public Guardian will provide details of the returns achieved by protected parties. If evidence is not produced in response to this consultation, then the Government may continue with its present assumption that the use of a mixed portfolio is likely, and may even assume that the current discount rate is too low and should be increased. This of course would have a significantly beneficial effect on insurers' reserves. Having said that this may render periodical payments even more attractive to claimants.
  • It is understandable that the consultation raises the question of periodical payments as an alternative vehicle when it is considering the level of the appropriate discount rate, and whilst that option will remain a favoured one in certain quarters, it is difficult in fact to see it as an alternative that is going to be thought to be suitable to be used much more widely than at present.
  • The consultation is open until 7 May. Insurers may wish to use this opportunity to put forward their views on the discount rate in response. The noises coming out of Government through this consultation suggests that it may be well worth doing so.

To read our full review of the consultation, click here and scroll to the bottom of the page.

If you wish to discuss any of the issues raised or have any comments or views to put forward please contact Philip D’Netto on 0161 603 4966 or at philip.d'netto@dwf.co.uk

By Philip D'Netto

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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