The government has rejected criticism from peers that the previous Lord Chancellor was wrong to announce a new discount rate and then start a consultation on how it should be set in future.
Justice spokesman Lord Keen of Elie said that had Liz Truss not acted, she would have been “in breach of her legal obligation” to maintain an appropriate rate under the current formula.
He was responding to a ‘motion of regret’ brought by Conservative peer Lord Hodgson of Astley Abbotts, that the change was made “just before the completion of a further consultation on how to set that rate more effectively in the future”.
Lord Hodgson argued that using index-linked gilts as the benchmark for investment returns ignored the “portfolio theory… that diversification is the best way to offset risk”.
“A more conventional approach might suggest, in addition to index-linked and other gilts, investing in some prime corporate bonds and some blue chip UK or overseas equities.”
While recognising the need to change the rate since it was last set in 2001 – saying that “as a result of the failure by successive governments to address this issue, victims may prove to have been undercompensated in recent years” – Lord Hodgson said the “draconian” change to a rate of -0.75% had “a direct and substantial effect on the public finances” and led to above-inflation rises in motor insurance premiums.
“I suspect—perhaps I should say I hope—that the Lord Chancellor did not understand or was not properly briefed or advised on the likely full impact of her decision.
“Certainly, having made this dramatic decision on Monday 27 February, which led to a storm of controversy, she then announced that there would be a further consultation. As my regret motion makes clear, this appears to be putting the cart before the horse.”
With the government due to respond to the consultation by 3 August – it has received 135 responses – Lord Hodgson said the experience showed that the discount rate needed to be renewed more frequently “to minimise the risk of over-compensation or under-compensation. This will also avoid the massive jerks on the tiller which have so disconcerted the insurance industry this year”.
Further, he said, the notion that investments should be in gilts only “is no longer appropriate”, while parties that “are very risk-averse should place increased reliance on periodic payment orders as a better means of offering security”
Labour justice spokesman Lord Beecham said the opposition of insurers, amid claims that the new rate would lead to higher premiums, was “par for the course for an industry that in recent years has done so much to increase its profits, not least by persuading the government to effect changes in the realm of personal injury claims, while making little, if any, reduction in premiums”.
He quoted a figure calculated by claimant firm Thompsons that insurers have saved “a staggering £30bn” during the last 10 years of the 2.5% rate.
“There is little or no evidence that this has been reflected in reduced insurance premiums,” he noted.
Lord Beecham said that “in general” he supported the new rate, and went on to question why the Ministry of Justice (MoJ) had then issued its consultation.
“The then Lord Chancellor stated that she wanted, ‘to make sure that the way in which the discount rate is set remains fit for purpose’. One might have thought that, nearly seven years after Kenneth Clarke initiated the process which led to the order we are debating, that matter might already have been taken into account.”
He also strongly criticised the MoJ’s failure to provide a financial impact statement to go with the new rate.
Liberal Democrat Baroness Kramer, a former banker, said she did not understand why the government persisted in applying a formula that it knew was “entirely inappropriate and comes up with a preposterous result, particularly when they have almost completed a consultation, with a review to follow which, we hope, will mean that they go back to the drawing board in a matter of weeks to try to right this set of wrongs”.
She added: “I would become very angry with a junior banker who blindly applied a completely inappropriate formula. When it is a government blindly applying a completely inappropriate formula, it begins to be unforgivable.”
Former justice minister Lord Faulks QC agreed that the problem was “adherence to a formula which is inappropriate”, saying that the approach should be on the basis of a cautious, rather than risk-free, investor.
He continued: “If we are to approach the assessment of compensation on the basis that claimants should not be taking too much by way of risk, surely periodical payments offer a significant advantage.”
Lord Keen observed that a consultation in 2013 reached “no consensus” on any changes.
“So, as at 2013, the coalition government, of whom the noble Baroness, Lady Kramer, was a member, took no steps to deal with what she referred to as a preposterous state of affairs. Indeed, it was not at that time a preposterous state of affairs.”
Defending Liz Truss, he said: “The Lord Chancellor is under a continuing duty to ensure that the rate is set at an appropriate level. This means that once the then Lord Chancellor reached her decision on what the appropriate rate should be, she was legally obliged to put that decision into effect.
“The option of delaying setting the rate until the outcome of the planned consultation was known was simply not available to her…
“Had the Lord Chancellor adopted the approach proposed by my noble friend and delayed a change in the rate until a consultation—and no doubt any consequent change in the law—had been complete, she would have knowingly maintained an inappropriate rate for what might have been a considerable period of time. That would have been in breach of her legal obligation with respect to the setting of the rate.
“Consequently, the approach taken by the Lord Chancellor was correct in law.”
Lord Hodgson withdrew his motion, which was a vehicle to discuss the issue.