The government needs more evidence on how claimants invest their damages before changing the discount rate, MPs said today in a report welcomed by claimant lawyers.
The Lord Chancellor, David Lidington, asked the justice select committee to review its draft legislation amending the way the rate is handled, and the result today was a report urging caution as the evidence provided to date “is not adequate”.
In September, the Ministry of Justice announced that it wanted to change the basis on which the rate was calculated, setting it by reference to ‘low risk’ rather than ‘very low risk’ investments as now.
The committee’s report welcomed the government’s commitment to the principle of full compensation for claimants, but recommended that it clarify what it meant by this, given that lump-sum awards will nearly always either under or over-compensate individual claimants.
It advised caution in considering evidence of claimants’ behaviour to set the discount rate: the risk they accept may be driven by the rate itself.
The committee concluded that while it may be reasonable to change the assumptions on which the discount rate was calculated if they were no longer representative of ‘real world’ behaviour, it needed to be sure this was the case.
The report said: “We do not believe the evidence presented on this point so far is adequate. We recommend that clear and unambiguous evidence is gathered about the way claimants invest their lump sum damages before legislation changes the basis on which the discount rate is calculated.
“If the rate is to take account of investment behaviour, a mechanism must be established to keep those responsible for setting the rate informed about that behaviour. This mechanism must ensure it captures the behaviour of those claimants who do not access professional investment advice and fund management.”
The committee observed that there was no consensus about what type of portfolio would be suitable to set a discount rate for claimants.
“We recommend that the Lord Chancellor publishes the basis upon which he or she has decided upon a particular rate out of the range available. We also think that it may be problematic for the Lord Chancellor to use investment behaviour of claimants to set the rate of return within the range.
“There are no such data widely available, and currently no mechanism in the draft legislation to obtain those data; and also claimants could be taking on more risk because they are being under-compensated.
“Until the government obtains data on whether claimants are being appropriately compensated and not just with regard to investor risk, we recommend that the Lord Chancellor as a starting point sets the rate at the lower end of the range of “low-risk” to avoid the risk of under-compensation for claimants.”
Other recommendations included that the government should establish “a means of assessing whether the legislative framework compensates claimants fairly for their losses, and ensuring adequate safeguards to prevent significant under-compensation of the most vulnerable claimants”.
The committee said that instead of targeting 100% compensation, the government should consider adopting as a target the median level of compensation “to tend towards over-compensation; or should at least ensure that there are adequate safeguards to prevent significant under-compensation of the most vulnerable claimants”.
The report also recommended that legislation should require the expert panel and the Lord Chancellor expressly to consider whether to set different discount rates for different periods of loss or different heads of damage.
Committee chair Bob Neill MP said: “Setting the discount rate is much more than a technical decision. It is about how we as a society treat people who have been seriously injured…
“It involves balancing the interests of claimants with defendants, and also balancing the social costs of increased clinical negligence payouts and increased insurance premiums with protecting the interests of vulnerable claimants.”
“If the government remains convinced that it must change the assumptions it makes about how damages will be invested, to adjust the balance between the interests of different groups in society, it should say so. It is vitally important that we get this right, and that changes are evidence-based”.
Brett Dixon, president of the Association of Personal Injury Lawyers, said: “The justice committee is to be applauded for reminding the Government that it must consider the needs of injured people before changing the way the discount rate is calculated.
“The committee has pulled no punches in challenging the arguments and assumptions made by the government and the insurance industry, and the evidence on which those assumptions are based…
“The government must now stop and take time to gather robust evidence about the impact of its proposed changes on injured people. It must not be pushed into baseless reform by the vested interests of the insurance industry when the welfare of catastrophically injured people and their families is at stake.”
Huw Evans, director-general of the Association of British Insurers, argued that the proposals balanced the interests of claimants, customers and taxpayers “by ensuring that the rate reflects claimant investment behaviour, a fact supported by evidence from financial experts supplied to the government”. He continued: “Further evidence would only become available if claimant advisers were willing to provide it – to date this has not been supplied.
“For good reason no other comparable country in the world has set a rate this low, and it is widely recognised that reform is vital. It is time to press ahead in the interests of getting a system that is fair for everyone.”
David Johnson, a member of the Forum of Insurance Lawyers and partner at Weightmans, said: “Overall, the report does not prevent government from moving forward with the legislation. Some notes of caution are set out within the report and will need to be addressed before the industry can move away from the current -0.75% discount rate towards a higher rate.
“If the government acts on the recommendations within the report, there will be further delays, which in turn, is not good news for insurers.”