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Former top judge sounds alarm over “flawed and rushed” discount rate consultation

Brooke: MoJ showed its ignorance

A former senior judge has expressed alarm at the way the government is rushing to “neutralise” the impact of the Lord Chancellor’s decision to cut the discount rate to -0.75%, based on what he says is a flawed consultation and without considering the effect on injured people.

Sir Henry Brooke, former vice-president of the Court of Appeal and chairman of the Law Commission in 1994 when its set out the basis for the Lord Chancellor’s powers to fix the rate, also said that the Ministry of Justice’s consultation [1] on how the rate should be set in future, published last week, did not allow enough time to gather the evidence needed to consider the issue.

Writing on his blog [2], Sir Henry – who now practises as a mediator from Fountain Court Chambers – said: “My overriding concern is that in the apparent rush to neutralise the main effect of the Lord Chancellor’s recent decision, sight will be lost of the fact that we are concerned with very seriously damaged people, for whom insurers have contracted for reward to provide a full indemnity for such injuries.

“They will have engaged solicitors to act for them in promoting their claim, but the damages they are awarded will not provide them with the ability to continue to retain those solicitors – not, that is, without reducing the size of the capital sum they have been granted for quite different purposes – still less to retain the services of independent financial advisers, whether to help them make their initial investments or to continue to help them for the rest of their lives, being the period over which their damages must be made to last.

“There is not a word about this very obvious need in the ministry’s consultation paper.”

Having explained how the 1994 report followed a period of “meticulous research and consultation”, Sir Henry said a new study was to be welcomed 25 years on “so long as it was conducted with the independence and thoroughness of a Law Commission study, supplemented by research of the quality of the study Professor Hazel Genn conducted for us all those years ago”.

Instead, there is a consultation that – “despite the complexity of the subject-matter and the fact that no similar in-depth research study has been conducted since ours” – has been reduced to six weeks.

“In the light of the breakneck speed with which this consultation is being conducted, one would have hoped that the ministry would have set out accurately the history of the discount rate issue,” he said, before going on to point out a number of mistakes in it and that the MoJ admitted to its “complete ignorance about important features of the personal injuries scene today” – namely, how claimants invest their awards.

“After admitting the scale of its ignorance, the ministry hopes to fill the gap not by commissioning rigorously independent research, as the Law Commission did 25 years ago, but by inviting respondents to fill all the gaps in their knowledge in a consultation period limited to 23 working days (excluding weekends and holiday periods).”

He continued that “the scale of the ministry’s ignorance” was further revealed by its statement that the assumption on which the current discount rate is based “was not derived from and was not intended to reflect actual claimant investment behaviour.”

Sir Henry said: “In fact the Law Commission made it crystal clear, and the same evidence strongly influenced the House of Lords in the leading case of Wells v Wells four years later, that it was basing its recommendation on Professor Genn’s finding that the recipients of very large damages awards tended to be the most risk averse of the entre cohort of claimants whose cases she and her team had studied.”

Meanwhile, the new discount rate is a major feature of the reasons given this week by AIM-listed Frenkel Topping, a specialist independent financial adviser and asset manager focused on asset protection for vulnerable clients, for considering a sale of the group.

Describing itself as the “market leader in an attractive and growing market segment with significant barriers to entry, which is set to be transformed by the recent [discount] rate ruling”, it told investors that “the scale of the opportunity presenting itself” was sufficiently large that it may require the group to combine with “a larger, strategic partner” to make the best of it.

“The announcement in February of the change in the Ogden discount rate has dramatically changed how compensation damages are calculated,” it said in its announcement to the stock exchange.

“The group estimates that the size of court damages will likely grow substantially (with an average potential uplift of c.80%) and there will be an increase in client preferences for lump sum amounts to be managed (as opposed to periodical payment orders). These factors are expected to increase the market opportunity significantly and result in a material uplift in the rate of AUM [assets under management] growth for Frenkel Topping.”

The company, which has around £750m of assets under management, is forecasting revenue of c.£8.5m and profit of c.£3.5m in its current financial year.

Finally, a survey of nearly 3,000 people by uSwitch found that 83% did not believe insurers should increase the cost of insurance premiums to cover additional costs brought on by the new discount rate. Nearly three-quarters (70%) also agreed that insurers should be responsible for paying the whole compensation sum to the victim of an accident, rather than a reduced rate that accounts for interest earned by investing the pay out.

However, with insurers saying premiums could rise by up to £300 for older drivers, three in five (58%) said they did not think the changes were a good idea.

The company said insurers should swallow the increased costs. Rod Jones, insurance expert at uSwitch, said: “Insurers must face up to the fact that compensation reform is overdue. The Ministry of Justice is right to protect the rights of claimants seeking full and fair compensation and we hope this latest consultation doesn’t see insurers shirking their responsibilities.

“Let us not forget that insurers have only just won a huge victory on recent whiplash reforms, which is likely to reduce the number of claimants who will receive a pay out. Passing on the cost of the amended discount rate would be a gross example of the insurers having their cake and eating it too.”