Settling the matter

In the current economic climate, financial advisers would hardly be regarded as flavour of the month.

It is extremely hard to find a person who remains unaffected by the current credit crunch and general meltdown in global markets. However, it is precisely because of these circumstances that obtaining financial advice becomes even more important '“ particularly when involved in personal injury litigation.

Historically, financial advice played little or no part in the calculation of damages awards and was looked on as a post-settlement issue. However, that position has changed radically over the past two decades and, particularly where there is a large element of future loss involved, financial advice can now play a critical part.

Since 1 April 2005, the courts have had the power to impose periodical payments, i.e. damages awarded in the form of a 'pension' rather than a conventional lump sum for all elements of future loss. In practice, this has largely been restricted to future care and case management but, in the majority of maximum severity cases, these heads account for a significant part of the damages award. It was felt that the court's power to impose periodical payments would lead to a significantly higher uptake, but this proved not to be the case.

Quite apart from there being a natural reluctance to depart from the traditional lump sum method of settlement, the fact that periodical payments were historically linked to the Retail Price Index also acted as a deterrent.

Removal of a barrier

However, since the Court of Appeal decision in the Thompstone cases, a series of actions where the issue of appropriate indexation was argued, the court held that awards for future care and case management should be linked to an earnings-based index, rather than the RPI. This at a stroke removed a significant barrier to the use of periodical payments. All four cases argued a similar point and the vast majority of the evidence heard was provided not by lawyers, but by labour economists and financial advisers.

The input of the financial advisers in each of the claimants' cases was vital, not only with regard to the appropriate index but also with regard to the appropriate balance to be drawn between the level of periodical payments and a conventional lump sum award. This will continue to be the case as there are inevitably pros and cons both for periodical payments and lump sums, and each case will need to be treated on its own merits.

The reference to case management is an interesting one, and those practitioners who have been around for a considerable time will remember the days before case managers had even been heard of. This specialist role was looked upon at the time by the insurance industry as merely a claimant ruse to invent another head of damage, and thereby increase the award. Now, however, they are accepted as an integral part of the claimant's team, providing an essential role both pre- and post-settlement. Financial advisers would now look to play a similar part, both pre- and post-settlement, in ensuring the claimant obtains maximum benefit from his award.

The role of the financial adviser pre-settlement requires financial analysis, rather than actual financial advice, in trying to determine the optimum method of settlement to meet the claimant's needs. Equally important is his role post-settlement, when attempting to put into practice the theory of damages, i.e. that the claimant invests the money and lives off the capital and interest to meet his needs for the rest of his life. This is a daunting task, but equally a very necessary one.

The question of capacity

In practice, there are distinctions depending upon whether the claimant has capacity or is a protected party. For a claimant with capacity, he can make his own decisions and may decide he prefers a lump sum, but it is imperative that he has had the various options fully explained to him. It is no longer sufficient for a solicitor to obtain a large cheque, shake the client's hand and congratulate himself on a job well done. While the claimant is fully entitled to make whichever decision he chooses, it is vital that the solicitor has a sufficient disclaimer should the claimant choose a lump sum over periodical payments, particularly if that lump sum is then dissipated.

A useful analogy is that of Camelot, who runs the National Lottery. Camelot has a panel of financial advisers, whose services are offered to all winners. It is entirely up to the individual as to whether they wish to avail themselves of the advisers' services but if they choose not to, they sign a disclaimer acknowledging the fact that financial advice was offered. This is a practice which could well be useful for claimant solicitors where clients opt to take the lump sum. Some of the larger firms may have their own in-house financial advisers but it is crucial that they have access to appropriate expertise, particularly in large damages awards.

The situation is somewhat different where the claimant is a protected party. Under the Mental Capacity Act, the advisers and the deputy appointed must act in the best interests of the claimant which may well conflict with the claimant's actual wishes. In these instances, periodical payments are likely to be more closely considered and will be subject to scrutiny by the court when approving the settlement, whether it be on a lump sum or periodical payment basis.

Similarly, a professional deputy has a vicarious responsibility to look after the funds, and will usually have access to appropriate advice. Where professional deputies may have in-house financial advisers, many firms will outsource the investment advice to avoid any accusations of conflict of interest, were they to instruct their own in-house advisers.

This is not necessarily the case where there is a lay deputy, who will often be unused to handling large sums of money. Since the implementation of the Mental Capacity Act, the Investment Division of the Court of Protection, which was historically the default mechanism for both lay and professional deputies, has been disbanded.

The onus is on the deputy to obtain financial advice on behalf of the protected party, with the single caveat that the advice be taken from a person who is authorised by the Financial Services Authority.

No distinction

The difficulty with this approach is that all financial advisers have to be authorised by the FSA, which includes independent financial advisers and tied agents alike. No distinction is made between the benefits of independent financial advice, i.e. an adviser who has access to the whole market, and advisers tied to a particular product provider with a limited range of investment options. Similarly, even a 'general' IFA may have little or no experience of the investment of damages awards. As was noted in Wells v Wells [1998] 3 All ER 481, recipients of damages awards are not to be regarded as 'ordinary investors'. They are much more likely to be risk-averse, as a finite award has to last over an unknown period with unknown and changing needs.

With regard to the cost of instructing a financial adviser, this also needs to be distinguished between pre- settlement and post-settlement. It is explicit in CPR41 that, in respect of periodical payments, a report from a financial adviser is a legitimate cost in the cause, just as with other expert reports. A financial adviser's involvement up to and including the settlement plays an important role in determining the appropriate method of receipt of the damages.

However, even where periodical payments form part of the award, there will always be a lump sum which is required to be invested for all the other heads of damage, and these costs are unlikely to be recoverable from the defendant as determined in Eagle v Chambers [2004] EWCA Civ 1033 (CA). Thus the cost of the ongoing investment advice post-settlement will be borne by the claimant.

While a financial adviser is likely to be useful in other areas of a solicitor's practice, i.e. wills and probate, divorce, etc, it is really in personal injury cases where the adviser's involvement will become an intrinsic part of the claim. This can be traced back to the introduction of structured settlements, and it is interesting to note that this year marks the 20th anniversary of the first structured settlement in the UK (Kelly v Dawes).

The introduction of structured settlements required the court to focus on the post-settlement situation, and the prior approval of the Court of Protection was necessary for any structured settlement entered into on behalf of a patient. Although the Court of Protection is predominantly involved in the patient's affairs post-settlement, the fact that a structured settlement was being entered into was determining the method of award, i.e. the claimant was relinquishing a capital sum in return for a guaranteed income, therefore the Court of Protection had a legitimate interest examining proposed structured settlements prior to their implementation. With the introduction of the Courts Act 2003 we have now gone full circle, where Court of Protection involvement is no longer required and the court decides how the award should be made, taking its yardstick as the best interest of the claimant.

Integral role

Because of this financial analysis from an appropriate expert is vital to assist the court and the parties when making that crucial decision. Unlike case managers, financial advisers as a profession have been around for decades. Like case managers, specialist financial advisers should now be considered an integral part of the claimant's case when the solicitor is compiling his 'dream team' of experts to bring together for the ultimate benefit of his client, the claimant.

On a final note, it is useful to recall the comments of Nicholas Bevan, partner at Bond Pearce:

'Those who continue to turn a blind eye or otherwise fail to advise their clients on periodical payments expose themselves to a very real risk of facing a professional negligence claim in years to come, as and when the money runs out.'

It may be that professional indemnity considerations, coupled with a solicitor's duty to his client, may finally prevail in this important arena.

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