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Discount rate: judgment day?

Review decision to be announced by 31 January 2017

A surprise announcement

Yesterday morning the Lord Chancellor Liz Truss announced by way of a statement to the London Stock Exchange that she was “undertaking to review the discount rate for personal injury damages awards, and to announce the result of the review by 31 January 2017.”

By way of an explanation for the length of time the review has been taking, the statement emphasises that the exercise of setting the discount rate is a complex one and that such an important decision with potentially “profound financial consequences” requires “the kind of detailed and thorough review capable of commanding public confidence”.

It concludes by confirming that the outstanding steps including the mandatory consultation with the Treasury and Government Actuary “should be completed in short order.”

The process of reviewing the discount rate and the methodology in setting it began of course in August 2012, after a review had first been announced in November 2010. In August 2014 it was revealed that a panel of experts was to be appointed to prepare a report giving expert investment advice to assist with the review but the panel only began its considerations in March 2015. It is known that the experts have reported to the MoJ but the report is yet to be published. In a separate exercise that started in the summer, the analytical services team of the MoJ has been carrying out research to improve the quality of advice to Ministers on the impact of any change in the rate.

Following the statement, APIL reported that the announcement had arisen out of the judicial review which they had notified to the Lord Chancellor.

What’s going on?

The news is not only a surprise to many, but it is questionable how it fits together with the MoJ’s current collection and consideration of data which was thought to be required in order to evaluate the number of claims that would be affected by any change, and the extent of the impact on those claims. It is entirely understandable that the analysis was required in order to have proper visibility in this area and if that is no longer the MoJ view then the basis for the change of position is unclear.

Assuming the MoJ position remains unchanged then it is unclear whether there is a genuine expectation that the analysis will be concluded before the promised statement, and it may surprise many if it were suggested that it will be. That being the case, any decision in January would seem to cut across processes already started on behalf of the Lord Chancellor which were apparently part of the review process, and so itself may be vulnerable to legal challenge.

If a decision is announced in January then alternatives would include the rate remaining unchanged, or of course it either being raised or lowered. Any decision to lower the rate, if that is being considered, would potentially have an inflationary effect on the cost of claims and therefore on motor insurance premiums. This would seem inconsistent with the current government approach originally outlined in last year’s Autumn Statement and now the subject of the current whiplash consultation which has the aim of reducing the average motor premium by £40 per policy. Whether there has been any proper modelling done to assess the impact of any change of rate on the government’s current reform agenda is also unclear but the suspicion is not.

In the meantime, whilst conventional gilts are at historic low levels, the stock market has been booming and there are plenty of financial advisors achieving investment returns in excess of the current 2.5% discount rate. While claimant commentators suggest a reduction in the rate would be appropriate, this can by no means be the anticipated outcome from the review which remains unclear. The continuing pressure on public finances, and the uncertainty surrounding the impact of Brexit, add to the complexity.

In addition to consideration of whether the rate will go up or down the Lord Chancellor may be considering a different approach altogether. One of the questions from the 2012 consultation asked whether there should be more than one discount rate. Whilst one rate would clearly be simpler to apply it was suggested that the greater flexibility of two or more rates might help produce greater overall accuracy in the calculation of awards as a range of rates could better match heads of loss and a greater range of circumstances.

The Damages Act 1996 already permits the Lord Chancellor to prescribe different rates of return for different classes of case (s.1(3)). It has been widely thought that any reduction of the discount rate would place an intolerable burden on the NHS, and while it would not take much of a leap to imagine a different rate for claims against the NHS, this may be difficult to justify politically.

With that in mind, following a year of surprises in 2016, if an announcement indeed comes in January then it may not perhaps be such a surprise if the rate were to remain where it is. An alternative outcome involving a change in either direction, particularly whilst the data collection exercise appeared to be ongoing, could be vulnerable to challenge.

What is clear though is that during the transitional period leading up to the announcement it is likely that claimant solicitors may try to suspend all negotiations in the highest value cases unless insurers are prepared to agree to review the proposed terms of settlement post the announcement.

Any change in the rate can be expected to be immediate as before, and will require insurers to ensure that reserves are accurate and up to date. This may explain the release of the announcement yesterday to the London Stock Exchange

The background to the hurried announcement adds unwelcome uncertainty not only around outcome, but the process currently being adopted. Even after the announcement had been made yesterday, an MoJ spokesperson was quoted as taking the ministry’s longstanding position that the result of the review would be announced “in due course”, with no mention made of January. In the light of the developments over recent months prior to what has now been said on behalf of the Lord Chancellor to APIL, there must be some doubt as to whether her commitment is one which she will realistically be in a position to keep.

Contact

For further information please contact Charles Ashmore on 01908 255594 or at charles.ashmore@dwf.law

By Charles Ashmore

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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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