Faulks: Discount rate change was overly cautious

Faulks: Lord Chancellor went right to the bottom of the permissible margins

David Gauke was overly cautious in deciding to increase the discount rate by only a small amount and it will “almost certainly” lead to over-compensation, former justice minister Lord Faulks has argued.

The QC – who is a leading clinical negligence practitioner – said the decision last July to increase the rate from -0.75% to -0.25%, when it had been widely expected to be 0-1%, was at the limit of the then Lord Chancellor’s discretion.

Speaking at an Association of British Insurers (ABI) event on civil justice reform this week, Lord Faulks noted that there was “always a lot of prudence” built into setting the rate and that, in his advice to Mr Gauke, the Government Actuary built in “margins for sensitivity”.

He continued: “The Lord Chancellor went right to the bottom of the permissible margins, given all the imprecision that I’m sure that does exist in the figures.

“Surely the correct approach would be to try and strike a balance between over- and under-compensation. It seemed to me that he built prudence upon prudence upon prudence in coming to the view that he did.

“Of course, everybody is quite reasonably and appropriately anxious that the claimant is appropriately compensated, but the consequences of what I would suggest is almost certainly – not inevitably – over-compensation is of course a very big bill for the NHS and for insurers, with consequent knock-on effects on premiums, which is not in anybody’s interests.”

Lord Faulks said the Civil Liability Act 2018 gave the Lord Chancellor “a considerable degree of discretion” when reaching his decision and ultimately it was this that made challenging the legality of the decision too hard – the ABI considered but eventually dropped the idea.

But the silk considered the decision was “very, very close in my view to the margin of what was legally acceptable”.

“What can be done about this?” he asked. “Can the argument be made that actually people should be compelled to take periodical payments?

“There has always been this power but it’s not in general been exercised because judges have been reluctant to weigh in, particularly if there’s been a consensual agreement between those represented at a high level, but it is possible that judges could be persuaded to do that.”

In the debate that followed, Carolyn Mackenzie, director of complex claims at insurer RSA, said courts would rarely impose periodical payment orders (PPOs) where the claimant has been advised to seek a lump sum.

“If the financial evidence and legal advice supports a lump sum, the court is unlikely to go against their wishes.”

She said cases that would have settled with a PPO before the discount rate changed continued to do so – such as children and older claimants with limited life expectancy – but “for claimants in two minds, they can be advised that a larger lump sum is attractive because it gives them greater flexibility”.

Gus Park, managing director of motor, underwriting & pricing at Direct Line Group, argued that it was “just a matter of time” before a dual discount rate was introduced.

“The process we’ve just been through shows a single rate is not fit for purpose,” he said.

Claimants with short and long “time horizons” invested very differently and it was “impossible” to set a rate that was right for both groups – last year’s change had the short-term claimants in mind.

He was ambivalent about increasing the use of PPOs, explaining that insurers still did not like them because of the length of the obligation they impose.

Andrew Parker, a partner and head of strategic litigation at defendant law firm DAC Beachcroft, described the change as a “political decision being made by an outgoing Lord Chancellor at the same time as the appointment of an incoming prime minister in circumstances where the views of those two people – in particular on the impact of Brexit – were radically different”.

He added: “I think it’s fair to say it was a decision of its time.”

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