Ministry of Justice announces new plans for discount rate preview

The Ministry of Justice (MOJ) has today announced the results of its consultation of the discount rate.

The former Lord Chancellor, Liz Trust, announced in February 2017 that the discount rate was to be reduced from 2.5% to minus 0.75%. The insurance industry reacted with outrage and immediately had a private meeting with the Chancellor, Phillip Hammond, to express their dismay and to request an immediate review.

The MOJ obliged, announcing the start of a consultation into how the discount rate is calculated on 30 March 2017. The consultation closed on 11 May 2017. The expectation was that the MOJ would find a way to increase the discount rate to a level which was more acceptable to the insurance industry. There has been a delay in the announcement of the findings of the consultation, no doubt caused by the general election in June 2017. 

The MOJ has now published a response paper and draft legislation which will allow the discount rate to be set on the basis that personal injury claimants are ”low risk” investors rather than “very low risk” investors. The expectation is that the discount review will be reviewed and revised within 90 days of the legislation coming into force.

The MOJ has stated that if the rate were reviewed today by reference to a “low risk” investor, then it would be in the region of 0% to 1%.

There is confirmation that independent expert panel will be created with the aim of reviewing the rate every 3 years.

Today’s announcement brings no surprises but will certainly create more uncertainty especially with ongoing cases. We do not know how long will it take the draft legislation to come into force or whether the MOJ will be able to publish a review within 90 days. This will leave both claimants and insurers in a period of limbo. Negotiations will be complicated and difficult. Insurers will base settlement offers on an assumed rate change. It will be difficult for Claimants to accurately assess Part 36 offers and they will have to consider a number of potential scenarios.

I doubt the rate will be changed before Christmas given the need to change primary legislation but I expect the MOJ to try and push this through early in the New Year.

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