Discount rate decision delayed
On 7 December 2016, the Lord Chancellor, Liz Truss, confirmed that she would announce the review of the discount rate used when calculating future financial loss in injury claims by 31 January 2017. This announcement was met with widespread surprise from both sides of the claimant and defendant divide. The Ministry of Justice’s review of the discount rate started in 2010 and had seemed to have been stuck on a dusty shelf never to be revealed. The ongoing delay had led to the Association of Personal Injury Lawyers (APIL) instigating a judicial review against the Government on the basis that the rate was too high and claimants were being undercompensated. Whilst it was successful, no announcement was forthcoming until December 2016. It was particularly surprising, given the announcements from the Ministry of Justice including a consultation looking to increase to the small claims limit and to widen the scope of fixed costs in injury cases, both of which are completely anti-claimant.
The insurance industry immediately panicked. The Association of British Insurers (ABI) sought an injunction to stop the Ministry of Justice making an announcement by 31 January 2017 with their director urging the Lord Chancellor not to rush out an announcement at a time of significant global financial uncertainty. I am not sure taking 7 years is rushing but I appreciate the sentiment. The legal action failed but on 27 January 2017, Liz Truss, confirmed that the announcement would again be delayed and would not be published by 31 January 2017. She apparently remains committed to making an announcement in February 2017. Many are sceptical this will happen.
What is all the fuss about? It arises from the basic principle that the purpose of damages is to put, so far as money can, the injured person back into the position he or she would have been had the accident not occurred. In any cases involving future loss, a claimant may receive damages for losses they may not incur for several years into the future. For example, a 20-year-old claimant who has to stop work when he is 40 years old, will receive his entire claim for loss of earnings at the time of settlement. That Claimant could technically invest that money for 20 years before his loss starts and be overcompensated.
Therefore, a claimant has to give credit for the early receipt of money using actuarial tables which apply a notional discount rate. This rate was set by the Lord Chancellor in 2001 and since that time has assumed that a claimant would be able to invest their damages free risk at an interest rate of 2.5% a year after tax and adjustments for inflation.
The argument from claimants is that it is no longer (or never has been) possible to obtain a risk free real net rate of 2.5% a year and therefore they are being undercompensated. The evidence suggests that the rate should be reduced to reflect reality. If the rate is reduced to say 1% or 1.5% it would mean that a significant claim for future loss would increase dramatically. This is why the insurance industry are so opposed to any review.
This is a big deal to seriously injured claimants and the ongoing uncertainty over the announcement is causing difficulty for both claimant and defendants. Claimants whose cases are near to settlement or trial, are obviously concerned about reaching any final agreement based on a 2.5% rate as any announcement may mean that their case is then worth significantly more. Defendants are concerned as they have no certainty as to the level of damages they may have to pay a claimant.
I welcome the announcement of the review of the discount rate. It should address a wrong which has been ongoing for years and has led to claimants being undercompensated but it needs to happen soon. Please hurry up Lord Chancellor!