The new government has made clear that significant reform of the discount rate remains firmly on the agenda after the election.
In a speech this week to the Association of British Insurers, City minister Steve Barclay said the change in the rate earlier this year “concerns me, and I know it will concern many of colleagues in Parliament”.
Mr Barclay, also economic secretary to the Treasury, continued: “We are currently considering the responses to the consultation we’ve received… We want to make sure that the way the rate is set is put on the firmest possible footing in future, so that we have a better and fairer system for claimants and defendants.
“In doing so, we will keep true to the 100% principle: that a claimant is paid no less than they should be, and no more.
“In short, we have been consulting on moving away from a mechanism that has grown outdated and, with negative returns on interest-linked gilts, lost its connection with the way people invest in the real world.”
It is still not known if the Ministry of Justice will look to use the Civil Liability Bill – ostensibly about reform to small injury claims – as the vehicle for any legislative change required after the discount rate consultation.
Meanwhile, a recent High Court ruling shows that a negative discount rate can have negative consequences for claimants, according to Andrew Parker, head of strategic litigation at defendant firm DAC Beachcroft.
He said that in JR v Sheffield Teaching Hospitals last month, Mr Justice Davis held that the correct award for the cost of purchasing alternative accommodation suitable for the claimant’s needs was nil.
In an article about the case, in which DAC Beachcroft acted for the defendant, Mr Parker explained: “JR’s current accommodation was not suitable; the parties agreed that a new property should be purchased and adapted.
“If JR were awarded the full capital cost, he would be left with an asset that would appreciate in value and be realised by his estate on death, generating a windfall and over-compensating him.
“The correct approach to avoid over-compensation was provided by the Court of Appeal in Roberts v Johnstone, which awarded a sum equivalent to the loss of income that would be achieved if the capital used to purchase the property were invested in risk-free investments. In Wells v Wells in 1998, the House of Lords endorsed the use of the discount rate as the appropriate rate.
“The claimant in JR argued that a positive rate had to be used and suggested 2.5% (equalling more than the capital cost of the property), but the judge rejected that.
“He accepted that the logic of the discount rate being set at -0.75% was that the claimant could not obtain a real return above inflation from risk-free investment of his award, therefore the appropriate award for the loss of income from capital was nil.”
The claimant has been granted permission to appeal. He also commented that he had no evidence before him to consider any other approach. “Legal teams in other cases are no doubt considering whether to seek permission for such evidence,” Mr Parker said.
“However, the logic of Roberts v Johnstone still fits with the full compensation principle and should be upheld. Ultimately, legislation may be the only answer for those who seek a different approach.”
Mr Parker noted that responses from claimant bodies to the Ministry of Justice’s recent consultation supported a negative rate, but in JR the claimant argued that for other purposes the rate has to be positive.
“This is just one of the logic gaps surrounding [former Lord Chancellor Liz Truss’s] decision,” he said.
Meanwhile, car insurance premiums are set to rise by up to 29% by January 2018, according to ERS, the UK’s largest specialist motor insurer, with the lower discount rate a “key factor” in this.
It attributed £21 of the extra £60 it forecast standard car drivers would pay for their insurance to the discount rate change – taking the average premium to £360 – and £330 of the £720 extra a taxi driver can expect to pay, taking their premium to over £3,000.
Finally, a survey of 131 claimant personal injury solicitors found they were “resigned” to the discount rate moving back up, with the majority believing it will be adjusted to between 1% and 1.5%. Just 10% expect it to stay where it is now.
Commissioned by Bill Braithwaite QC, the research indicated that just 28% of respondents had settled future loss personal injury claims since the discount rate changed to -0.75%.
Mr Braithwaite said: “Claimant personal injury solicitors are pragmatic. Under pressure from the powerful insurance lobby, they believe the government will roll over and backtrack on its decision earlier this year.
“An adjustment to between 1% and 1.5% would be a compromise, face-saving position for the government to adopt – but it would be a backward step for justice.
“Claimants should not be expected to run investment risks with money which a judge has declared is essential to their future health and well-being – yet this will be the reality of their situation if the government moves the discount rate back up.”
Mr Braithwaite said the low level of settlements was a further cause for concern.
“Are insurers delaying settlement meetings in anticipation of the discount rate moving upwards when the government acts on the second consultation?”
He said that claimant solicitors were achieving successes under the new rate, however, with 80% of claims proceeding under the -0.75% rate.