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Discount rate needs more regular review, Faculty argues
The personal injury discount rate should be reviewed more regularly is fixed, to avoid the “real injustice” caused by the recent major change, the Faculty of Advocates argued today.
Faculty was responding to the joint consultation by the Ministry of Justice and the Scottish Government on how the rate should be fixed in future, opened following the change in the rate earlier this year from 2.5% to -0.75%, the first change for 15 years.
Set by the Lord Chancellor in England & Wales, and by the Scottish Ministers in Scotland, the rate is used in calculating the lump sum to be paid in compensation where the claimant's losses continue for years into the future, and is based on assumptions regarding the rate of return on index-linked Government stock. The recent change had the effect of massively increasing the capital sum required particularly over longer periods.
Faculty's response states that such a “massive” change without any corresponding recent alteration in market conditions strongly suggests that there ought to have been a change in the rate much earlier.
It comments: “We have no reason to think that the existing legal framework does not justify the new discount rate, but the effect of this abrupt and huge change is to create real injustice for both pursuers and defenders.
“There is a significant difference between what pursuers would have received and what defenders would have had to pay out before and after the change, and that will be most striking for those whose settlements were closest in time either side.”
Faculty proposes a regular review by a body independent of the Government, which would allow financial conditions to be monitored and prevent large step changes.
“There is a strong perception that Government is not impartial because it pays damages in many of the higher value cases", the response continues. "There is therefore a need for an independent body to take the responsibility for setting the discount rate… A review every two years would provide certainty and reduce the risk of a sudden and major change in the discount rate as has just occurred.”
The response also supports giving Scottish courts, in line with those elsewhere in the UK, power to impose a periodical payment order. These are used in out-of-court settlements in Scotland but cannot at present be imposed by a court.
“In catastrophic cases involving children requiring significant future care, parents are keen for a PPO,” it says.
“If a case is settled on a lump sum basis and the child lives longer than expected, the family will run out of funds to pay for future care. This tends to be the main factor taken into account when agreeing a PPO. Understandably, most parents want their child to have access to an annual payment so that care for life is guaranteed.”
This would impact on cases such as those involving cerebral palsy where there is a dispute over life expectancy. If the case were settled on a lump sum basis and the child died earlier than expected, it could be thought that there had been overcompensation, and undercompensation if the child lived longer than expected.
“We do not consider that the current law in Scotland is satisfactory", Faculty concludes. "There should be far greater use of PPOs, particularly where life expectancy is in dispute."
Click here to view the full response.