Stuart McKechnie QC comments on MOJ’s response to report of Justice Select Committee on Discount Rate

The MOJ has today published its response to the report of the Justice Select Committee on the setting of the discount rate. The report can be found here:

The MOJ’s recommendations are reflected in the Civil Liability Bill that was introduced into the House of Lords this afternoon.

In summary, the MOJ has announced its intention that the discount rate be set by reference to a low-risk investment portfolio (as opposed to very low / minimal risk investment in ILGS as per Wells v Wells) to reflect what is said to be “real-world behaviour”. An expert panel will be appointed to advise the Lord Chancellor on setting and reviewing the rate at least every 3 years. Differential discount rates for different periods of loss and different heads of loss are not ruled out and are to be considered by the expert panel appointed.

There is no suggestion that there will be any separate recovery for investment advice, Instead, it is suggested that this will be a matter for the courts to consider further.

The MOJ has sidestepped the key recommendation from the Justice Select Committee that empirical evidence on actual investment behaviour is required before the current discount rate can properly be changed. The report comments as follows:

“The Government agrees with the Committee that the reforms to the setting of the discount rate should be based on good evidence of the way that claimants invest and that this evidence should be interpreted taking into account the effect that the circumstances in which the investment decisions were made may have had on the choice of investments. The Government does not, however, accept the Committee’s view that the Government’s evidence is insufficient to justify proceeding with the proposed reforms. It is clearly the case that basing the rate on average returns from Index Linked Gilts is not realistic. There is good evidence that claimants generally invest in diversified low risk investments. Each review will, however, have to be carried out on the basis of up to date evidence and analysis. To help prepare for the first review of the rate under the new law, which will follow shortly after the relevant legislation comes into force, the Government will call for evidence of investments made by claimants and the investments available to them and arrange for further analysis of the returns likely to be obtained during the passage of the Bill. The first review will then be able to be carried out with the benefit of up to date evidence and analysis.”

The MOJ has also moved away from the previous indication that the rate is likely to end up at between 0-1%:

“The 0% to 1% estimate was intended to be a helpful indication of the potential scale of the change in the rate, relative to the rate of minus 0.75% set in March 2017, that the new legal framework might produce. The publication of the figure was not intended to represent the actual outcome of a review. Creating estimates of the costs and benefits that would flow from rates in the region of 0% or 1% would be potentially misleading. The Government does not consider that it would be appropriate to speculate on the outcome of the first review of the rate under the new law.”

No indication is given on the likely timing of implementation of intended legislation under the Civil Liability Bill.

Regrettably, this news is only likely to add to the current levels of uncertainty facing seriously injured Claimants and those representing them.