§ 5.44 p.m.
§ The Lord Chancellor (Lord Mackay of Clashfern)
My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.
Moved, That the House do now resolve itself into Committee.—(The Lord Chancellor.)
On Question, Motion agreed to.
House in Committee accordingly.
[The LORD SKELMERSDALE in the Chair.]
Clause 1 [Assumed rate of return on investment of damages]:
Lord Irvine of Lairg moved Amendment No. 1:
Page 1, line 12, leave out from ("account") to end of line 13 and insert ("in exceptional circumstances").
§ The noble Lord said: This amendment was one that I heralded in my speech on Second Reading.
§ Clause 1 of the Bill deals with an issue that has been a subject of recent argument in the courts. It will be considered in the Court of Appeal later this year. The courts reduce awards made to victims, to compensate them for their future loss of earnings and the cost of care, to take account of the fact that they receive compensation in the form of an immediate lump sum which can be invested. To make an accurate reduction for this accelerated payment (as it is known) the courts must apply the best possible estimate of the rate of return that victims will earn on their investment. If the assumed rate is too high then the victim will have been undercompensated. If it is too low a rate he will have been overcompensated.
§ For a number of years there has been a general assumption by the courts that they should use an investment rate of 4 per cent. to 5 per cent. so as to make the appropriate discount. However, there is gathering concern that the appropriate rate of return on investments is lower than 4 per cent. to 5 per cent. so that victims are being significantly undercompensated.
§ The percentage figure of 4 per cent. to 5 per cent. is taken to have been laid down by a 1979 decision of your Lordships' House in its judicial capacity, and by a 1970 decision before that. The figure may have been right for its time though that is questionable, but obviously should not be regarded by the courts as an invariable prescription for all time. When this issue comes before the Court of Appeal later this year it is to be hoped that a more realistic rate will be set.
§ Clause 1 of the Bill confers a power on the Lord Chancellor of the day to set by statutory instrument a prescribed rate of return that the courts will be required to take into account in future cases. That is sensible. It will provide for a fixed rate, but with the flexibility to change the rate as and when necessary.
§ It is important to have a fixed rate on which parties to personal injuries litigation can rely. This saves costs and court time. Without a fixed rate both sides have to advance expert evidence in favour of their preferred rate. Practitioners in this field are very conscious of that. In a recent personal injury case, the combined cost to both sides of presenting expert financial evidence to establish the appropriate investment rate was about £15,000. We must be ever mindful to frame our laws in a way that does not encourage unnecessary cost in litigation.
§ However, I recognise that there may be exceptional cases where it is appropriate for the court to apply another rate. But those cases are exceptional and the legislation should recognise that.
As currently drafted, Clause 1(2) provides that, notwithstanding the existence of a prescribed rate, the court may apply a different rate of return,
if any party to the proceedings shows that it is more appropriate in the case in question".
§ We consider this provision to be too wide. It is likely to have the effect in practice of undermining the benefits that flow from the certainty of having a prescribed rate.365
§ The amendment is simple. It provides that the scope for departure from the prescribed rate should be limited to "exceptional circumstances". This formula is commonly used in legislation and the courts understand the restrictive intent underlying its use. It would operate as a disincentive to unnecessary and costly expert evidence and argument why the prescribed rate is said not to be appropriate in a particular case. The point of the amendment is that the prescribed rate will generally he appropriate. A party should be able to invite the court to depart from the prescribed rate only if the circumstances of the party's case are truly exceptional. I beg to move.
I have no interest to declare in the amendment, but I should advise the Committee that my background is in the insurance industry and I am currently briefed by the Association of British Insurers.
I do not believe that the noble Lord, Lord Irvine of Lairg, is correct in suggesting that in the great bulk of cases the current rate is wrong. Because of the mix of portfolios arranged at the time the lump sum is used, simply to use the current rate for gilts would in the opinion of the insurance industry overcompensate.
§ The Lord Chancellor
To some extent, my noble friend is heralding a later amendment on the matter which we shall come to. The question underlying a good deal of the discussion is what is the precise philosophy. As I said in response to the Second Reading debate, I would in any event be anxious to see what the Court of Appeal decides before exercising the powers conferred under the Bill.
There is a good deal of agreement about the desirable result of the legislation: it is to try to simplify so far as possible the assessment of damages. I understand the concerns of the noble Lord, Lord Irvine. Our aim is to avoid any unnecessary expert evidence and we have already introduced Section 10 of the Civil Evidence Act 1995 for that purpose. However, we should pause to consider what purpose a party might see for bringing in an expert or other evidence when the courts have, with or without legislative assistance, arrived at a discount rate which is accepted as reflecting the real rate of return on a plaintiff's investment of his lump sum in the generality of cases. Once such matters are established and accepted, I cannot see that it would be in the interests of either party to seek to introduce evidence that such a rate is not, after all, generally appropriate.
Clause 1 is designed to provide the courts with such guidance as may be necessary from time to time to take account of current changes and developments in the current economic climate and market conditions to achieve the element of certainty. It is obviously essential that the Lord Chancellor, exercising the power conferred by this section, should have the benefit of the widest possible consultation with those best able to advise. But even when that has been done, one achieves a degree of certainty, but there is a difference between a certainty as to what is generally appropriate and a rigidity which might oblige the court to apply what is acknowledged to be generally appropriate in a particular case where it was manifestly inappropriate and would lead to an unjust result.
366 It must be right to allow either party to draw to the court's attention some feature or features of the case before it which suggest that a different rate ought to be used in that case in order to arrive at a figure which would provide a more accurate reflection of the actual loss in that case. Where the case includes some feature which makes it appear wrong to apply what would otherwise be regarded as a routine calculation, that feature may or may not be regarded as an "exceptional circumstance". It would not be easy to define what was meant by an "exceptional circumstance" in such cases.
I agree that the phrase is common in the statute book. However, it may be that one such feature happened to appear in a significant proportion of the cases heard in one particular year. The factor that makes the statutory rate inappropriate may happen in many cases at one time and therefore, strictly speaking, the circumstances would not be exceptional but it would be perfectly apparent that the routine calculation was not appropriate. The court will have no difficulty in identifying those cases as they arise and there will be no encouragement for parties to digress by leading extraneous expert or other evidence in other cases. Clearly we could not in legislation identify and specify all the categories of case feature and which would influence the court in considering the application of subsection (2).
To take one example, the courts might consider the circumstances of plaintiffs to be affected by their own situation in regard to their assets. Someone with a large portfolio already might be willing to invest their damages less cautiously so as to produce a return larger than a plaintiff of more modest means could afford to contemplate.
The phrase that we used in the Bill refers to another rate being more appropriate. We are operating in a new area and I cannot foresee all the possibilities. Therefore, I prefer to adhere to what we have in the Bill. If a rate is fixed well—as I hope it will be—one would not expect a more appropriate rate to be fixed often. But, on the other hand, what must really be judged is the appropriateness of the rate rather than the circumstances which might be looked upon as exceptional. Circumstances which could suggest a different rate might occur in a run of cases where it could be hard to say in all of them that the circumstances were exceptional.
Obviously there is room for a difference of opinion on the matter, but I submit that the phrase in the Bill is the wisest at this juncture. As time proceeds, if that structure is used then a more precise formula might be advisable.
§ Lord Irvine of Lairg
If I may say so with respect, in his remarks the noble Viscount was anticipating Amendment No. 3, which I shall move, rather than this one.
I assure the noble and learned Lord the Lord Chancellor that I accept that this is a matter of fine judgment. I am not an enemy of flexibility for the courts. However, the criterion in the Bill in its present form—which is why I propose the amendment—is to my mind an invitation to any party to proceedings to try to persuade the court that a rate other than the prescribed rate is more appropriate in the circumstances of that party's case. That test can 367 therefore lead to very fine arguments and expert evidence. A criterion of "exceptional circumstances" is, by contrast, a much stiffer test. It would require a highly unusual departure in a particular case from the generality of cases. Therefore, it would operate as a disincentive to unnecessary and costly legal argument backed by expert evidence.
Nevertheless, I appreciate that the arguments are finely balanced. The noble and learned Lord prefers the Bill in its present form and therefore he is ready to run the risk to which I have called attention. In those circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ 6 p.m.
Lord Ackner moved Amendment No. 2:
Page 1, line 15, leave out ("and the Treasury").
The noble and learned Lord said: In the Explanatory and Financial Memorandum to the Bill, under the heading,
Financial and manpower effects of the Bill",
it is provided as follows:
The Bill's only likely effects on public expenditure are that any exercise of the power in clause 1 could affect the size of awards of personal injury damages against government departments, and that, under clause 6, ministers may accept secondary liability to support the primary obligations of public sector bodies".
§ In my respectful submission it is quite wrong that one should involve the Treasury as it is involved in Clause 1(3).
Clause 1 deals with the determination of,
the return to be expected from the investment of a sum awarded as general damages for future pecuniary loss in an action for personal injury".
Subsection (3) provides that,
Before making an order under subsection (1) above the Lord Chancellor shall consult the Government Actuary and the Treasury; and any order under that subsection shall be made by statutory instrument subject to annulment in pursuance of a resolution of either House".
§ Allowing a potential defendant to advise on a factor that affects the amount of damages he must pay is a startling and strange provision. If it stands, quite clearly justice will not be seen to be done. The Lord Chancellor is empowered to seek to fix the rate of return on investments to be used in the calculation after consultation with the Government Actuary; and the Government Actuary is well able to undertake without assistance from the Treasury his actuarial task, which is somewhat similar to that undertaken by actuaries in insurance companies which issue life and pension policies.
§ I suspect that the Treasury has been included in the clause because it is usual, as I understand it, to do so if expenditure of public money is involved. But damages payable by a government department is not public expenditure in the usually understood sense.
At Second Reading I asked my noble and learned friend the Lord Chancellor a question on this matter of which I gave him advance notice. I therefore had the
benefit of his reasoned reply. Among other things he said that the Treasury had, among other expertise, expertise,
in relation to … forecasting … which is essentially what lies behind the power in Clause 1".—[Official Report, 29/4/96; col. 1410.]
§ But we are not involved in forecasting. We are not looking into the future. The actual rate of return at the moment of the calculation is what is required. That is what is done, day in, day out, when there is a purchase, for instance, of an annuity.
§ It looks wrong, and is wrong, for the Treasury to feature in the way that it does in Clause 1(3). I beg to move.
§ Lord Meston
I contribute only this observation. At Second Reading the noble and learned Lord the Lord Chancellor explained that the reference to the Treasury came from the draft Bill annexed to the Law Commission report. So it does. But having reread the Law Commission report, I could not find anywhere any justification for the inclusion of the reference to the Treasury in the draft Bill. It may be that the Law Commission thought it self-evident, but it was not evident to me.
§ Lord Irvine of Lairg
I, too, look forward to the noble and learned Lord's explanation as to why the Treasury is included. It occurs to me that it is possible that the Treasury could have market-sensitive information which it might be relevant for a Lord Chancellor to know: why, for example, a return on a particular security might not be a useful guide for a particular rate to be prescribed. I am not sure about that. However, I certainly welcome the opportunity by way of this amendment in the name of the noble and learned Lord, Lord Ackner, for the noble and learned Lord the Lord Chancellor to explain the thinking behind the inclusion of the Treasury.
§ Lord Simon of Glaisdale
The words "with the consent of the Treasury" or "after consultation with the Treasury" appear in measure after measure. They are practically always unnecessary. They are unnecessary here. The internal machinery of government takes care in every case that the Treasury is consulted about any matter that may involve expenditure.
The Treasury has a number of officials, some of whom are specifically earmarked to departments and are in close daily touch with departments. They are invariably consulted during the drafting of any measure, including regulation, and will rapidly intervene if there is any Treasury interest. In this case, it appears that the words are not only unnecessary but have given rise to considerable disquiet as expressed in this debate.
On many, many occasions all governments have been pressed to omit from statute these and other unnecessary words. Their only valid, and valuable, purpose is to provide employment for parliamentary draftsmen, their secretaries and typists and the printers of parliamentary proceedings and in due course the statute. No doubt in the end that is a substantial body of employment, but it is utterly wasted and unnecessary and is a waste of money. The Treasury should itself get rid of the 369 provision. It clings to these words because it believes they are an extra safeguard against departments rushing wildly ahead and incurring expenditure without consent or consultation with the Treasury. The words are quite unnecessary. I am very glad that this matter has again been pinpointed by means of the amendment tabled by my noble and learned friend Lord Ackner.
§ The Lord Chancellor
If my noble and learned friend Lord Simon of Glaisdale is right, it will not matter whether this amendment is given effect to from the point of view of the ultimate result. It is that aspect of the matter that my noble and learned friend Lord Ackner—
§ Lord Simon of Glaisdale
Perhaps my noble and learned friend will allow me to intervene. He is quite right. It makes no difference in the actual result. But justice should not only be done but be seen to be done.
§ The Lord Chancellor
Precisely. If it is right that the Treasury should be consulted, it is right that that particular aspect of the matter should be public rather than swept under the table, as it were, because the provision is withdrawn from the Bill. If accepted, the argument of my noble and learned friend Lord Simon of Glaisdale would lead to the view that the Treasury would be consulted in any event, even though that did not appear in the statutory provision.
§ Lord Ackner
Perhaps my noble and learned friend would be kind enough to give way. I do not accept that it would be right for the Lord Chancellor to consult the Treasury when the Treasury is a defendant and likely to gain in accordance with the advice he gives. I should have thought that the Lord Chancellor would be the first person to recognise that one does not seek the advice of someone who is parti pris.
My point is much more fundamental than purely a drafting point. It is wrong that it is in the Bill, and it would be wrong if it is taken out of the Bill, to consult a potential defendant as to what he thinks is the interest he should pay on the damages that sooner or later he will be ordered to pay.
§ 6.15 p.m.
§ The Lord Chancellor
That is precisely what I had in mind in suggesting that the point made by my noble and learned friend Lord Ackner would not at all be met by the point made by my noble and learned friend Lord Simon of Glaisdale because the view of my noble and learned friend Lord Ackner is that it would not be right for the Treasury to be consulted.
I do not accept that point. But I certainly suggest that the matter is not one that is dealt with on the usual argument that my noble and learned friend Lord Simon of Glaisdale has put in a number of Bills with which I have been concerned and, I am sure, a great number of Bills with which I have not been concerned; namely, that whether the words are in or out, it does not make any difference because that is what in fact happens.
It is true that the Treasury would be responsible for securing the implementation of an award against a government department. As my noble and learned friend 370 pointed out, there is also the possibility of the Treasury being involved when Ministers accept secondary liability to support the primary obligations of public sector bodies in the sense that public expenditure might be involved in that connection.
In my submission, it would be perfectly right for the Lord Chancellor to consult with potential defendants. I should certainly expect to consult the insurance industry in any attempt to settle such matters and also to consult, as I do from time to time in connection with these matters, those who would be representing plaintiffs: trade unions representing plaintiffs and gatherings of professional bodies who represent plaintiffs from time to time. It would be for the Lord Chancellor to make the proper use of whatever advice or estimate he received. Obviously, in relation to this Bill a good deal of consultation has taken place. I have no doubt that my noble friend Lord Chelmsford will raise this issue later in a little more detail.
The Treasury has an expertise which is important to have in mind. As I said at Second Reading—I was obliged for the notice of the question and when I answered my noble and learned friend I did so on the basis of the notice that the question would be put to me—the reasons that I gave are perfectly good ones. The Government Actuary and his department is one repository of expertise but within the Government it is certainly not the sole repository of expertise on the subject of investment and money markets generally.
My noble and learned friend said that we were not concerned with the future but only with the present and determining a figure for the present. But we determine a figure which will rule so long as it is fixed under the Act until a new figure is put in. But the purpose of the figure is to help to determine the return to be expected from the investment of a sum awarded as general damages for future pecuniary loss. As I understand it, the theory of the law—my noble and learned friend will correct me if I am wrong—is that what the lump sum tries to do under the "pecuniary loss" head is to provide a sum which, coupled with the return which is obtained on it from investment, will compensate for the future loss which the plaintiff has. Therefore, there is a considerable element of judgment in relation to the future involved in this exercise.
It is true that one way of doing that is to accept the judgments of those who are in the market for index-linked government securities at any one moment of time. But the exercise is the exercise that I have indicated. That is what one is trying to do: obtain the best figure one can which will convert the pecuniary loss which has been determined as likely to accrue to the plaintiff into a capital sum, which with its interest and the capital itself will compensate the plaintiff over the years—it may be quite a long time—for that particular loss.
In my submission, the Treasury has an expertise in forecasting—there are differences of view about how great that expertise is, but undoubtedly it has the function of seeking to make such estimates—and it would be right for the Lord Chancellor to take account of it. I submit that the Lord Chancellor would be one 371 who would take into proper account those observations and representations from the Treasury. I have no doubt, as I said, that in fixing the rates a very wide consultation would be expected.
The complexity involved in the selection of rates should not be underestimated. One has only to look in the relevant section of the Financial Times to see the range of possible figures. As is explained in the explanatory notes to the actuarial tables published by the Government Actuary's Department, the published rates make no allowance for the incidence of tax on the income from a compensation award. Assumptions must also be made about the rates of inflation. Also, although swings may not be vast, there are fluctuations which can add to the complexity. Thus, I should certainly believe it right to look to the Treasury, among others, to advise me, and would consider whether it would be helpful here to specify other expert consultees.
I believe that it is perfectly right in the circumstances of this case for the Treasury to be consulted. The Committee will notice that the formula here is not the one to which my noble and learned friend Lord Simon of Glaisdale referred in the first instance as the "agreement" of the Treasury. This is a consultation with the Treasury. It is true that it appears in the Law Commission Bill, probably on the view that it is self-evident. There is no detail at all supporting why the Treasury is mentioned but I feel that the reasons which I gave underlie that.
So I submit that it is perfectly right that the Treasury should be consulted, the rule-making authority having the duty of using the representations in the proper way and not simply on the basis that because one party to a potential action wants one thing, that is what should happen. In the light of that explanation, I invite my noble and learned friend to withdraw the amendment.
§ Lord Ackner
The observation of my noble and learned friend Lord Simon of Glaisdale that this provision has given rise to disquiet has in no way been negated. I ask myself why it gives rise to disquiet. The Explanatory Memorandum makes it perfectly clear that the Treasury is likely to have a stake in the way in which the specific prescribed limit is eventually worked out. If that disquiet is justified, then the disquiet concerns consulting the Treasury at all and it will not be removed by it being publicised, "We have taken it out because it looks better, but we propose to do exactly what we would have done if it had been left in." The disquiet would continue and justifiably so.
I should like an opportunity to consider in more detail the observations made by my noble and learned friend the Lord Chancellor with a view to considering whether or not to return to this matter at Report stage. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Irvine of Lairg moved Amendment No. 3:
Page 1, line 15, after ("Treasury") insert ("and in particular shall take into account the net return on any existing index-linked government security").
§ The noble Lord said: This is the second of the two amendments which I heralded on Second Reading. I regard Amendment No. 3 as a probing amendment to clarify the approach that it is intended that the Lord Chancellor and the Secretary of State for Scotland should take when setting the prescribed rate which courts will have to take into account when discounting a lump sum because of the "accelerated payment" element in compensation for future pecuniary loss.
On Second Reading, the noble and learned Lord said that he would consider what the Court of Appeal had to say on this issue later this year before setting the prescribed rate. That, I accept, is sensible. He also said that he would consult widely before setting the rate. That too is sensible. However, the Law Commission has already considered this issue and consulted widely on it. In its report, Structured Settlements and Interim and Provisional Damages, the Law Commission concluded that the appropriate rate was the net return on an index-linked government security. Paragraph 2.28 of the report states:
We share the views of the majority of those who responded to us, that a practice of discounting by reference to returns on index-linked government securities would be preferable to the present arbitrary presumption. A 4-5% discount which emerged from the case law was established at a time when index-linked government securities did not exist. Index-linked government securities now constitute the best evidence of the real return on any investment where the risk element is minimal, because they take account of inflation, rather than attempt to predict it as conventional investments do".
§ We on this side of the Chamber—I have said this before—are anxious to ensure that any under-compensation of victims should not continue. We would therefore like to hear from the noble and learned Lord the Government's current view on the specific Law Commission recommendation that the prescribed rate should be based on the net return on index-linked government securities. I beg to move.
I regret that the insurance community does not agree with the Law Commission on this point. I hope that the Committee will agree with me that the most appropriate discount rate is the one that most accurately matches the investment return available in the commercial markets for prudent and wisely-managed investments.
The courts to date have consistently held that a rate of between 4 per cent. and 5 per cent. is appropriate and that rate is derived from considering the rate of return available on a balanced portfolio of investments, including equities—a "balanced" portfolio. The insurance industry believes that it is unrealistic to use such a low discount rate as the 2.5 per cent. which is the index-linked rate of today. It has three basic reasons for suggesting that.
First, there is the analysis carried out by the stockbrokers Barclays de Zoete Wedd in January this year. It shows that the real return available on index-linked gilts is less than half that available on equities. Index-linked gilts have under-performed both cash and conventional gilts. They also do not feature in an optimised portfolio run for UK assets over the period 1983 to 1995.
373 Secondly, independent financial advisers indicated that they would not recommend investment of a large lump sum—that is to say, several hundred thousand pounds—only in index-linked gilts. That is simply because, with a prudent investment strategy and with minimal risk, a much greater rate of return can be achieved on the investment. Typical advice would be to select a spread of equities, gilts and with-profit investments.
Finally, there is the Court of Protection. That is a body which exists to approve investments made on behalf of persons under a disability—for example, minors or mentally incapable persons. Advisers to the Court of Protection indicated that they generally invest in a balanced portfolio of assets. As much as 70 per cent. of that might be in equities. Of the remainder only a small fraction is generally placed in index-linked gilts.
In summary, therefore, the proposed amendment fails to take account of the higher rates of investment which can be achieved with a minimal risk to the investor; that is, the accident victim. And using the lower rate will also lead to higher lump sum awards which the insurance industry believes amount to over-compensation. Incidentally, any such increase will be passed on in increased premiums to all policyholders, especially to motorists and employers.
§ Lord Meston
I cannot help feeling that the exchange of views which the Committee has just heard—with the noble Lord, Lord Irvine, on one side and the noble Viscount, Lord Chelmsford, on the other—will encapsulate the debate which will be the subject of pending appeals. The plaintiff will be arguing that he must be properly compensated and protected; the defendant will argue that prudence is not the same as excessive caution.
My only contribution is to point out that the Bar Council, in its response to the Law Commission's consultation paper, favoured the reference to index-linked government securities, which undoubtedly provide good, fresh economic evidence. The Bar Council concluded that in most cases no better guide existed. It said that a discount rate should be based on the ILGS return.
§ The Lord Chancellor
I am grateful to the noble Lord, Lord Irvine of Lairg, for what he said at the outset of his speech on the amendment. The purpose of setting a rate to be applied generally is to obviate the need for evidence in as many cases as possible, as we discussed in relation to Amendment No. 1. On the other hand the courts are fixing damages in relation to rights of action which accrued some time before and usually are covered by contracts of insurance which operated at that time.
When the court makes a change in the law, if it ever does, it will have retrospective effect because the court is dealing with something that happened in the past and is seeking to compensate. There is no doubt about the principle of law involved; that is, that the court is seeking to award a sum which will compensate the plaintiff for, in this case, the pecuniary loss which is the subject of general damages. The law therefore is clear 374 enough in its general principle. As usual, the application of that general principle to the circumstances of a specific case may involve difficult questions.
The difficulty in relation to an Act of Parliament is that it can only properly operate retrospectively in exceptional circumstances. The normal rule of statutory enactment that I have been accustomed to seeing followed is that one does not make retrospective alterations. Therefore, it is extremely important for this power to await the decision of the Court of Appeal on the basis of the present law in the light of the investigations that have been done by the Law Commission over the past year or two to which I referred at Second Reading. I would aim to try to get out of that ultimate decision taken in relation to these cases a principle which would guide one as to the rate that one would take.
There is no doubt that other rates should be considered. It is not just one. The amendment says,and in particular shall take into account the net return on any existing index-linked government security".The exact return depends a little on the other terms of the security. That is not unique. Therefore, there is more than one. The amendment seeks to take into account the net return. I certainly would be intending that we take that into account but I should also like to know what else is regarded as important. For example, it may well be that a balanced portfolio would have only a portion of such securities in it and that a wise adviser would think that, if a substantial sum was being invested for the purpose of giving a return and in total, along with the return, compensating the plaintiff for future pecuniary loss, that investment would include things other than index-linked government securities. So the estimate would have to try to take account of that.
This is a quite complicated exercise. My approach is that it would be right to take into account what the Court of Appeal says is the correct approach to this matter, put into it such information as we have from time to time as to what these various elements would produce in the way of a return and then try to average it over the total of a typical portfolio. I hope that in the light of that explanation the noble Lord will feel able to withdraw his amendment, on the basis that I would wish to take account of all the information available to me—I am sure that this would be true of the Lord Chancellor of the time, as this is to be done from time to time—and also consult widely the interests of plaintiffs and of defendants. I am sure that the Bar Council would figure among those properly consulted probably on both sides of that boundary.
§ 6.30 p.m.
§ Lord Irvine of Lairg
We have, on the one hand, the opinion of the Law Commission and, on the other hand, we have the views of the noble Viscount, Lord Chelmsford, who, if I may say so without any discourtesy, dealt a very full hand and acknowledged that he represents the views of the insurance industry. I propose to consider the noble and learned Lord's response and whether this is an issue to which we should revert at Report. We have but one opportunity to legislate. We have to legislate now regardless of when 375 the Court of Appeal gives its decision and regardless of when, if there were an appeal from the Court of Appeal to your Lordships' House in its judicial capacity, your Lordships' House gave the final decision on this matter.
This is a modest amendment because its effect, as I think the noble and learned Lord acknowledged, would be no more than that a mandatory relevant consideration for him to take into account in prescribing the rate would be the net return on index-linked government securities, which for my part I am sure is the best evidence of the real return on any investment where it is intended that the risk element in the investment should be minimal. The noble and learned Lord would not be governed by that consideration. I think it would give much confidence if there were written into the Bill an acceptance that the noble and learned Lord should have regard to that which the Law Commission advises him is the best guide but which he would have a discretion not to apply if he thought that there were other overriding considerations indicating a different rate. Nonetheless, for the present, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 1 agreed to.
Clause 2 agreed to.
Clause 3 [Provisional damages and fatal accident claims]:
The Lord Chancellor moved Amendment No. 4:
Page 2, line 13, at beginning insert ("as was intended to compensate him").
§ The noble and learned Lord said: This is a minor drafting amendment to correct an error which crept into the final preparation of the Bill. It is not absolutely essential, but the original draftsman intended to have it in and regrets that it did not appear in the final version. I think it adds to the clarity of the Bill. I beg to move.
§ On Question, amendment agreed to.
§ Clause 3, as amended, agreed to.
§ Clause 4 agreed to.
§ Clause 5 [Meaning of structured settlement]:
Lord Mishcon moved Amendment No. 5:
Page 3, line 41, after ("value") insert (", including adjustment in respect of the reasonable costs of financial advice sought by the plaintiff on the investment of the award").
§ The noble Lord said: I nearly needed a structured settlement myself as I walked very casually into your Lordships' House some five or 10 minutes ago believing, as I was led to believe, that the business of the Committee stage of this Bill would not be taken before seven o'clock. I have partially recovered and therefore propose to move this amendment but with the courtesy of apologies to those who moved previous amendments and to the noble and learned Lord that I was not present at the very beginning of the Committee stage.
§ This is a worthwhile amendment. Your Lordships will well know that the costs of investigating potentially structured settlements or of advising an accident victim 376 on the investment of a lump sum by way of damages can be a very significant sum, particularly in the case of a young severely injured victim who receives an award of perhaps £500,000 or £1 million, which will need very careful husbanding over many years to ensure it produces sufficient income for the victim's ongoing needs and does not run out in the lifetime of the person concerned.
§ I understand that conventionally it has been accepted that any fees payable to the Court of Protection which invests damages awards for patients are recoverable from the defendant as part of a claim, but there is no similar convention or statutory provision which applies to the cost of investment and financial advice incurred or likely to be incurred by a plaintiff in other circumstances. Indeed I understand that there have been conflicting decisions of the courts in this respect. Given that these costs are incurred by a plaintiff accident victim only because of his or her injuries, it would be entirely logical to make statutory provision that the reasonable costs of investment advice should be recoverable from the defendant tortfeasor. The Bill could provide an opportunity to tidy up this anomaly. That is why I move the amendment.
§ The Lord Chancellor
I believe that our dinner hour must have started early this evening because the noble Lord, Lord Mishcon, noticed that it was expected that this particular matter would be dealt with at that time. However, the Scots are so expeditious that the Education(Scotland) Bill was dealt with extremely quickly. I hope that the Scots involved in this matter will show the same expedition.
I do not completely understand why the noble Lord, Lord Mishcon, wishes to put in a matter as regards the relationship of investment advice to structured settlements because it is primarily to avoid the need for a capital investment in respect of the periodical payment element that this particular arrangement is made. I suspect that the amendment may have been intended to have a somewhat wider scope than this particular situation. Where it appears in the Bill means that it has very limited scope. I am not aware of any reason why a structured settlement under which the periodical payments are adjustable to take into account the cost of subsequent financial advice taken by a plaintiff should not in fact attract the same protection as settlements without that feature. Neither can I see any reason why a settlement should contain such a feature because one of the major benefits of structured settlements for a plaintiff is that he is not to be concerned with investment matters and that aspect of his award. He will not be investing an award because the settlement is tailored to provide the income and the capital needed to meet his particular requirement.
Indeed, the Committee may consider that this amendment anticipates that the negotiations for a structured settlement may have gone somewhat wrong if this provision were to be required. The noble Lord may be glad to know that the position as regards the cost of financial advice in relation to the settlement of damages as a whole, and not structured settlements, is one of the matters now under consideration by the 377 Law Commission in its examination of the law of damages. It will be covered in a forthcoming consultation paper. As the Committee knows, the work that we are dealing with in this Bill is only part of the total, and the Law Commission is looking at quite a number of heads that ought to be considered in this regard. I fully anticipate that this particular subject matter, not in relation to structured settlements, but generally, will be the subject of its consideration. I hope that, with the encouragement that the matter will be looked into thoroughly and will be the subject of a Law Commission recommendation, the noble Lord, Lord Mishcon, may feel able not to press the amendment at this juncture.
§ Lord Mishcon
I hope that the Committee will not think that I have been unduly subtle since that is a quality I have never possessed. I was of the opinion, and the noble and learned Lord has confirmed it, that had I tried to deal with this matter under the general head of damages I would have been ruled out of order and very properly so, because this Bill deals with structured settlements and not with the general issue of damages.
I have had the opportunity of raising the matter. With his usual courtesy, the noble and learned Lord has told me that it will be considered by the Law Commission under the general head of damages. Therefore, I hope that I have at least pointed the way. I ask the Committee's leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ 6.45 p.m.
Lord Meston moved Amendment No. 6:
Page 4, line 3, at end insert—
("( ) Without prejudice to the other provisions of this section, the funds held by an authorised insurance company to provide payments from an annuity purchased from that authorised insurance company pursuant to a structured settlement may be held by that authorised insurance company as part of a pension annuity fund.").
§ The noble Lord said: The encouragement in this Bill of structured settlements has been widely welcomed. The Government had already taken steps to reduce the tax burden so that the flow of income received by a plaintiff from annuity-based arrangements is not subject to income tax, nor any other taxation, in the hands of the recipient. That has the benefit of reducing the gross cost to the defendant. This amendment seeks to deal with one aspect of structured settlements where tax still impinges and where, although it is not widely appreciated, there is still a burden on defendants.
§ The majority of structured settlements are provided by one or more annuities purchased by the defendant's insurer from a life office to provide regular income for the plaintiff, tax free. However, the income from which those payments are made is liable to tax before it reaches the plaintiff because life offices must maintain annuities for structured settlements as part of their life annuity fund, which annuities are taxed at 20 per cent. That tax burden has therefore to be incorporated into the overall lump sum required to fund a structured settlement. That imposes a higher burden on the defendant and may be a disincentive to an otherwise desirable solution to a particular case.378
§ If annuities can be maintained by life offices as part of their pension annuity fund, the 20 per cent. tax on income would not arise. I understand that life offices would have no problem in segregating such an annuity within the pension annuity fund and I suspect that there would be a fairly minimal difference to the revenue. Having said that, I am conscious that this amendment may be thought to trespass on the financial privilege of another place and, therefore, I emphasise that at this stage it is only a probing amendment. I beg to move.
§ The Lord Chancellor
I am grateful to the noble Lord for explaining the purpose of this amendment. I had not been able to recognise precisely the term he had in mind. I have consulted with the Association of British Insurers on the matter. I understand that it is normal practice for insurance annuities to be covered by an insurance company's pension fund, although in some circumstances it may be covered by the long-term fund. However, as far as I am aware companies do not operate, nor have they asked to operate, special pension annuity funds. In any case, this differentiation is immaterial because in the event of a failure liabilities arising from both the long-term and pension funds would be covered by the Policyholders Protection Act.
However, having listened to the noble Lord this evening, I anticipate that he is asking for the treatment given to funds which arise under pension arrangements which enjoy special tax privileges on investment. That is clearly a Finance Act-type provision. Therefore, I will not be in a position to deal with that aspect of the matter if some special tax relief is wanted, not only in the hands of a recipient, but also in the basic funds which are used to provide it. That is a different matter.
The obligation of the annuity provider is to provide it out of whatever fund is considered appropriate. There would not be a need for an allocation. The tax treatment of pension funds which are derived from, for example, the self-employed arrangement, leads to a fund derived from the original taxpayer. The taxpayer is allowed to put in money which is earmarked from that stage and it enjoys certain benefits. The annuity which has to be provided is not of that character exactly. As I say, my consultations so far have not produced any real basis for this measure, but I understand what the noble Lord says. He would like some further tax privilege for some fund as yet not completely identified.
§ Lord Meston
I had thought that the amendment was proposed as the logical way of taking forward the overall immunity from tax of structured settlements—in other words, that the impact of tax should not have to be a consideration either in the mind of the plaintiff or his advisers or in that of the defendant and his advisers and insurers. I understand the reasoning behind the answer that has been given by the noble and learned Lord. The objective of the amendment was to find some way, artificial though it might be, to reduce the overall cost of structured settlements. I am conscious that this trespasses into the area of taxation, but it is a matter on which I wish to consult further. For that reason, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
379 Clause 5 agreed to.
Clause 6 [Guarantees for public sector settlements]:
Lord Mishcon moved Amendment No. 7:
Page 4, line 27, leave out from ("designated") to end of line 29 and insert ("by regulations made by the Minister and subject to approval by resolution of both Houses of Parliament.").
The noble Lord said: The Committee will be aware that Clause 6 deals with guarantees of public sector settlements. In subsection (3) it is provided:
The bodies in relation to which a Minister may give such a guarantee shall, subject to subsection (4) below, be such bodies as are designated in relation to the relevant government department by guidelines agreed upon between that department and the Treasury".
The purpose of this amendment is not to leave it simply to guidelines but to ensure that the relevant Minister has power to designate and Parliament has publicly the right to deal with it by a resolution that comes before both Houses. I beg to move.
§ The Lord Chancellor
The purpose of Clause 6 is to facilitate the use of structured settlements. Ministers are given this new power so that there will be no technical difficulties preventing them from guaranteeing self-funded structured settlements offered by public sector bodies for which their departments have responsibility. It is given only to allay the concern of some plaintiffs' advisers that unless such backing can be put in place they will be failing in their duties to their clients to ensure the absolute security of the arrangements being made for the clients' future needs. That is a conscientious attitude and very proper, although I believe that it is unnecessarily cautious. The Committee will be aware of the reasons why such a guarantee would never in practice be called upon. It could be called upon only in the highly improbable event of the public body for which the department had responsibility not having the funds to meet its legal obligations or ceasing to exist without provision being made for its legal liabilities.
While it is true that such settlements are most likely to be relevant in the health sector where it is not difficult to identify those bodies likely to be offering settlements, the Government fully accepted the Law Commission's advice that this provision should have the potential to cover other sectors where public bodies might face personal injury claims which could to the benefit of the claimant sensibly be settled in this way, provided that his advisers could recommend the settlement as being fully secure. There are very many public bodies where this might be the case, albeit perhaps only very occasionally, and certainly not on the scale seen in the health sector. We considered very carefully how those bodies should be identified and reached the firm conclusion that the best way of doing this was by administrative arrangements between those departments which might be concerned and the Treasury. Once the Minister gives a guarantee, that is the security. It would be clear that the involvement of the Treasury as watchdog of the public purse would ensure that there could be no inappropriate use of the power. We regarded that as a sensible safeguard.
380 We also considered that it would be right to make provision for scrutiny by Parliament on a regular basis of the potential liabilities under and any payments which might have been made pursuant to guarantees by each department which had used the power. We concluded that, with these safeguards in place, it was unnecessary and undesirable to adopt any more cumbersome procedure. The Select Committee on the Scrutiny of Delegated Powers looked closely at this provision and was satisfied that it was a purely administrative procedure.
For these reasons, I hope that the noble Lord, Lord Mishcon, will agree that his proposal adds unnecessarily to the arrangements that have been put in place. Subsection (7) is the provision which requires public scrutiny. The only important matter from the point of view of the plaintiff is that the Minister should give the necessary guarantee. Parliament will be kept informed as to what guarantees have been given by subsection (7). Of course, Ministers are accountable to Parliament at all times for their actions in the public arena. In effect, it is the same as agreeing to a settlement. That is not subject to regulation. If a Minister agrees to settle an action, he or she can do so. This is part of the settlement of an action to which the Minister has agreed to give his or her guarantee in the circumstances required. We have provided these additional administrative safeguards to cover the situation.
While I am very glad to consider any proposals that may be an improvement, strictly speaking this is probably an additional administrative or regulatory burden which is not necessary in the circumstances of this case to secure adequately the plaintiff's interests, on the one hand, and the interests of the public as taxpayers, on the other. I hope that in the light of that explanation the noble Lord will feel able to withdraw his amendment.
§ Lord Mishcon
I am deeply grateful to the noble and learned Lord. I owe it in respect to him to consider what he has said when I read it in Hansard tomorrow. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 6 agreed to.
Clause 7 agreed to.
Clause 8 [Short title, extent and commencement]:
Viscount Chelmsford moved Amendment No. 8:
Page 5, line 24, at end insert—
("( ) This Act does not apply where the cause of action arose before this Act came into force.").
§ The noble Viscount said: Amendment No. 8 assumes that the Bill as currently drafted is passed and that my noble and learned friend the Lord Chancellor instructs the courts to use a rate of return equal to the current index-linked gilt edged rates. A larger sum will be needed initially to achieve a lifetime award than is currently necessary by discounting at the rate of 4 per cent. or 5 per cent. Put another way, a lower discount rate means a smaller adjustment for the 381 investment return and therefore increased compensation. This increase can and will be taken into account when setting premiums for future policies.
§ However, insurance companies have many thousands of claims in the pipeline awaiting settlement. These claims will arise under policies issued in the past. If the compensation due in these cases were to be increased by this legislation the industry could not charge any further premium to reflect that increase. That would be inequitable. That is the effect of the Bill as currently drafted. Under Clause 8(3) the legislation comes into force two months after it has been passed. Pipeline claims will then be assessed under the new rules. This is legislation with a retrospective impact.
§ Insurers believe that the impact can be eliminated largely by ensuring that the new rules apply only to accidents and claims which occur after the Bill comes into force. This will provide certainty for all concerned: plaintiffs, defendants, insurers and their advisers. My amendment offers this solution.
§ Initial consultation within the insurance industry shows that the retrospective cost is at least £200 million for motor insurers alone, although a figure of between £500 million and £ I billion is probably the truer cost to the insurance industry as a whole. Even if the amendment is passed, the industry will still pay larger amounts on current policies which produce claims after the Act incepts without any chance of further amendments. Although they accept that, they ask that there should not be retrospective legislation in respect of claims which have already occurred or still await judgment. I beg to move.
§ Lord Meston
My only observation is that it could work the other way: in pending appeals the court could decide that a low rate of, say, 3 per cent. was appropriate and the Lord Chancellor in formulating a prescribed rate under the Bill, if enacted, could decide upon a higher rate.
§ 7 p.m.
§ The Lord Chancellor
It must be correct that, as the noble Lord, Lord Meston, said, this could operate either way, depending upon how the power was exercised. That is the problem to which I referred earlier which troubles me about how precisely to go about this and why I wish to wait until the Court of Appeal, which is not in any way affected by the statute on this aspect, has decided what is the right way to go about it. When I said the Court of Appeal, I was intending to include the remote possibility that someone might think that it was not final on this matter and that a final judgment should come from the House of Lords. Assuming that the decision were appealed, I should think it right to wait for that.
The amendment would affect the whole of the Bill. I do not believe that it would be necessary for the purposes that my noble friend has explained to do more than apply it to Clause 1. I believe that the industry would be in favour of structured settlements coming in as soon as possible. They are of course in already, but there is a slight doubt about competency and that is settled by the Bill. So this applies to Clause 1 only.
382 However, in relation to Clause 1 it poses a difficult question which I sought to address somewhat tangentially earlier. If the settling of the rate were to cause a general increase or general decrease—either way—it would be in the nature of a retrospective interference with the ordinary course of development of these claims.
It may well be that the court—the court has been asked to do this from time to time—could decide that the previous rate of 4 per cent. to 5 per cent. is these days unrealistic, notwithstanding Lord Diplock's commendation of it, and that a new rate should be taken as being more realistic to achieve the aim which I understand to be the aim of the law; namely, to compensate the plaintiff for the loss which he or she has suffered. If the courts did that, it would raise the total of damages which insurers might thereafter have to pay. That would not be Parliament doing it; it would be the court doing it. That is the difficulty. I believe that the aim of the power should be to try to arrive at the figure that the courts would think the right figure at the present time. Therefore, it should apply not only to causes of action accruing after this date.
This is the most difficult aspect of the matter. It applies whether or not there is a fixed rate. Even the original Law Commission proposals had this problem attached to them. I have put forward the best solution; namely, by this power I would be seeking to approximate as closely as possible with what the court says is the proper level for the purpose of not altering the level but of merely making it easier for the future to reach that level without the necessity for detailed actuarial calculations.
The other possibility of course is to apply the amendment to Clause 1 only and then to leave it, as it were, to the Lord Chancellor to set a rate which might not reflect the existing rate but some rate which he thought was better—either up or down—than the existing rate. As I said, that is not what I believe to be the right aim in this matter, which raises a difficult question. I hope that my noble friend will feel able to withdraw the amendment and consider what I have said about it to see what is the best way forward.
§ Lord Mishcon
Before the noble and learned Lord sits down or the noble Viscount answers him, could I ask the noble and learned Lord, since he has mentioned actuarial calculations, why it is that Section 10 of the Civil Evidence Act 1995 has not yet come into force? I had a personal interest in that because I happened to move the amendment which the noble and learned Lord kindly accepted.
§ The Lord Chancellor
Similar considerations apply in respect of that provision as apply in respect of this. It may not be perhaps so clear, but obviously a similar problem arises. I am anxious not to involve myself, or anyone else for that matter, in Parliament retrospectively altering the basis upon which damages are assessed in respect of causes of action that have already accrued. On the other hand, Parliament is entitled, as I see it, to make procedural improvements in current cases where the substantive rights are not affected. In so far as it is 383 just an improvement in the procedure, that is all well and good, but there is an underlying feeling in some quarters that both Clause 1 and Section 10 of the Civil Evidence Act, which the noble Lord suggested on an earlier occasion should be put in place—it came out of this but we put it in a little in advance—could affect basic substantive changes in the level of damages, and I need to try to avoid that.
We have had an interesting reply from my noble and learned friend. I should like to think about all that he has said. I distinctly heard him say that he did not wish to damage the insurance industry through retrospective legislation, and that is the point about which the insurance industry is concerned.
384 Perhaps I may say to the noble Lord, Lord Meston, that a low rate of return means a higher award. I thought that I heard him say the opposite. He is nodding his head. We shall undoubtedly want to study what has been said today and possibly consult the Lord Chancellor further, because we are all trying to achieve the same end and we are not sure how to reach it. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 8 agreed to.
Schedule agreed to.
House resumed: Bill reported with an amendment.
§ House adjourned at eight minutes past seven o'clock.