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Truss to make decision on PI discount rate

Government forced to stop dragging its heels after claimant lawyers launch legal challenge

7 December 2016

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A threat of legal action has forced the Lord Chancellor, Liz Truss, to announce the result of a long-overdue review of the discount rate for personal injury claims after lawyers began to fight back against government attacks on the sector.

The Association of Personal Injury Lawyers began legal action against the Ministry of Justice amid ongoing concerns that seriously injured people have been undercompensated for years. The government will announce the result of its review by 31 January 2017, four years after closing its last consultation on the matter.

‘People with lifelong injuries are continuing to be undercompensated, in some cases, by hundreds of thousands of pounds, because successive governments have dragged their heels and failed to review the discount rate to reflect changes in the economy,’ said the president of APIL, Neil Sugarman.

The discount rate is used to calculate the amount deducted from an injured person’s compensation to account for any income he may receive from investing his damages. The rate was set by the then Lord Chancellor, Lord Irvine of Lairg, in 2001 and was based on yields generated by index-linked government stock (ILGS) calculated at 2.5 per cent. Since that decision was made, yields have declined to the point that the discount rate ‘is now clearly far too high,’ explained Sugarman.

As previously reported by Solicitors Journal, this is not the first time a threat of legal action has forced the MoJ’s hand to deal with the discount rate. As long ago as 2010, former Lord Chancellor Ken Clarke announced a review of the rate, but it was not until August 2012 that the MoJ issued its consultation paper ‘Damages Act 1996: The discount rate – how should it be set?’ in order to stave off the threat of a judicial review. A second consultation was launched the following February.

Peter Todd, a partner at Hodge, Jones & Allen, who acted for APIL, said there was little doubt the long-running review of the discount rate would have continued to drag on unless legal action was brought to challenge the delay.

‘I am delighted that a date for the conclusion of the review has now finally been announced,’ he said. ‘I hope the new rate will fairly reflect risk-free index-linked government investment bond returns net of income tax and hence the rate will be very substantially reduced.’

Also responding to the news, Kennedys said that any change to the discount rate must reflect the MoJ’s own research that PI claimants do not simply put their damages into low-risk investments.The international firm and its insurer clients argue that claimants want higher rates of return than can be achieved by ILGS. Instead they select a mixed portfolio of investments, which is backed by research published by the MoJ in 2013. The research also stated that even a small reduction in the rate would have a significant impact on public bodies and insurers.

Christopher Malla, a partner at Kennedys, said that to assume an injured party only invests in ILGS is 'to ignore what actually takes place' and could over-compensate claimants. 'Ultimately this could lead to higher costs for defendant bodies, such as the NHS and local authorities, and have a detrimental impact on already reduced public sector budgets,' he added. 
 
'The reality is that claimants put their damages in a mixed portfolio of investments, and there is good evidence that claimants have been able to achieve real rates of return, net of tax, of up to and above 2.5 per cent that way.' Malla also warned that if the rate falls and lump sums become more attractive as a result, there was a risk claimants may stop settling their cases by way of a periodical payment order, the 'fairest and most appropriate way of ensuring adequate funds are available over what can be a very long period of time,' he said.
 
The Lord Chancellor’s announcement comes almost a month after her department launched a consultation on plans to reduce the ‘unacceptably’ high number of whiplash claims which will supposedly allow insurers to cut insurance premiums. In his first Autumn Statement, the chancellor, Philip Hammond, confirmed the government’s intention to introduce legislation aimed at ending ‘the compensation culture surrounding whiplash claims’, despite the consultation only just being opened.
 
The Law Society has expressed concern over the government’s ‘ill-advised assault on personal injury laws’. Chancery Lane’s chief executive, Catherine Dixon, said the proposals would ‘completely undermine the right of ordinary people to receive full and proper compensation from those that have injured them – often seriously – through negligence’.
 
Speaking to Solicitors Journal, the society’s president, Robert Bourns, said the changes to the small claims limit and scrapping the right to compensation for whiplash injuries had serious implications for the civil justice network and an indirect impact on access to justice if law firms are forced to close. ‘We’ve seen it in relation to legal aid,’ he said. ‘A firm with a family legal aid contract would also give welfare advice. But if you lose one you lose the other capacity as well.’
 
John van der Luit-Drummond is deputy editor of Solicitors Journal
 

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