Civil Liability Bill [HL]

Lord Hodgson of Astley Abbotts Excerpts

Committee: 2nd sitting (Hansard): House of Lords
Tuesday 15th May 2018 Lords Chamber

Moved by

[Lord Hodgson of Astley Abbotts]

55: Clause 8, page 7, line 31, at end insert—
“( ) Rules of court under subsection (1) must draw attention to aspects of orders for periodical payments which may make them more suitable in cases where individuals have long-term injuries or are risk averse.”

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, as we begin to discuss Part 2, I return to an issue I raised at Second Reading: the use—or perhaps the insufficient use—of periodical payment orders, particularly in cases where compensation is payable for long-term injuries.

To summarise the position, periodical payment orders are a form of annuity that ensures that a guaranteed sum, usually index linked, is paid to the injured party as frequently as he or she requires—weekly, monthly, quarterly or annually. PPOs have two particularly significant aspects. First, they transfer all longevity risk to the insurance company. The insured does not have to be concerned that he or she may live longer than is actuarially assumed, with the possibility of having to live in reduced circumstances for the last years of their life. Secondly, PPOs transfer all investment risk to the insurance company. The insured does not have to worry that bad investment decisions made on his or her behalf might result in a reduction in his or her income. Those are two significant factors.

I hope that it is common ground that one of the major purposes of the Bill is to ensure fairness—to ensure that individuals suffering life-changing injuries are properly compensated for the rest of their lives, however long or short these may be, and that these payments are made within a framework that is fair to the other insured individuals, who will have to pay their share of the expenses. I remind the Committee once again that I am not a lawyer—but a court must find it incredibly difficult from a purely practical point of view when faced with, say, the tragic case of a young man aged 25 who is badly injured in a road traffic accident, and the impossible task of ensuring fairness between the parties and deciding in such a case what the right single lump-sum award of damages should be. What is the life expectancy of such a person?

I have heard it argued that one does not need to be concerned about individual cases because average life expectancy over a number of cases can actuarially be determined fairly. However, that considers the case only from the point of view of the insured and, indeed, the co-insured. It is not much help to the individual injured party—injured, say, at the age of 25—to hear, “We thought you’d only live for 35 years, but here you are. I’m so sorry that you’re still living now and that the money is running out”. Nor is it fair to the insured and the co-insured, that when such a person, very sadly, dies early of complications aged, say, 40, a potentially significant lump sum is passed to his or her descendants, who have virtually no locus in the case.

In those situations, periodical payments would ensure fairness—so why are they not the default option in cases of long-term injuries and for people with low risk tolerance? There appear to be a number of structural reasons why that is so. First, from the point of view of the insurance company, a lump-sum payment is neater and more administratively convenient. In essence, one could put a pink ribbon round the file—or, in modern parlance, send the case to the cloud—and forget all about it. Further, PPOs are unattractive to insurers because of the method by which they are rated for capital adequacy purposes. I will not detain the Committee this afternoon with a detailed explanation except to say that, under the technical provisions of reserving, the combination of a best estimate of liabilities, the risk margin and the solvency capital requirements makes PPOs unattractive.

Secondly, from the point of view of the insured, particularly someone who is less financially sophisticated, an offer of, say, £6 million as a lump sum may on the surface appear to be more attractive than, say, a quarterly payment of around £50,000. I have also heard that it is not impossible that families might prefer the lump-sum route in the hope of some windfall, and there may be financial advisers who see a long-term stream of fees for providing investment management advice and might prefer a lump sum to a PPO.

Thirdly and finally, the individual judge considering the award might find it outwith the court’s role to opine too definitely on the method by which the award should be paid. All these influences, although individually not particularly significant or decisive, collectively tilt the balance away from PPOs.

The Government recognise the challenge in increasing the take-up of PPOs in paragraphs 48, 49 and 50 of their response to the report of the Justice Select Committee. Paragraph 48 states:

“The Government therefore sees many benefits in the use of PPOs to provide compensation in respect of future losses … particularly those who are most dependent upon the provision of long-term future care. The Government agrees with the Committee that it is not obvious why PPOs are used in relatively small numbers of cases”.


The following paragraph states:

“Perhaps even more tellingly, there was little enthusiasm for any changes to the law regarding PPOs in response to the consultation … It is therefore not clear what might be done to increase the take up of PPOs”.


For those of us who received today’s briefing from the Association of British Insurers ahead of this Second Reading debate, we can see the push-back already beginning. Under the section on PPOs, it says that they are,

“available in 99% of all cases … Insurers continue to make PPOs available for claimants when requested”.

I think that the use of those words indicates that it is not top of insurers’ lists to make sure that it is even Steven between the ways in which these awards are paid.

I have been seeking ways to redress this imbalance and move towards a position where PPOs might become the default option in cases where compensation for injuries will be paid out over the long term or where the injured party has a low tolerance of risk or is risk averse. Amendment 55 is intended to achieve this by requiring changes to the rules of court which would encourage or require judges to consider wider factors, in particular longevity risk and investment risk.

As I said a few moments ago, I am no lawyer, and I have no idea whether Parliament can require the inclusion of specific provisions in the rules of court without infringing judicial independence. It may be that, in the course of this debate, there are other, neater ways of achieving this shift of emphasis. So Amendment 55 is a probing amendment at this stage. However, I am convinced that the present position is not satisfactory, and the Government essentially agree that that is so. I look forward to hearing my noble friend’s reply. In the meantime, I beg to move.

[Lord Sharkey (LD)]

My Lords, Amendment 92 in this group would require the Lord Chancellor to carry out a review of the impact of any new rate on the extent of the use of PPOs and to lay this report before Parliament. Our amendment has the same general purpose as Amendment 55 and as other amendments in this group.

The noble Lord, Lord Hodgson, has already spoken eloquently to Amendment 55 so I can be very brief. It seems to me that all the amendments in this group are intended to provide a gentle nudge in the direction of PPOs. Their purpose is to create conditions in which the incidence of voluntary uptake of PPOs may increase. Given the scope of the Bill, not to mention the ethical questions that would be created by any reduction in the freedom to choose or not choose PPOs, this is probably as far as we can go.

I hope the Minister will be sympathetic to the thinking behind all of these amendments, coming as they do from various parts of the House. If he is sympathetic, perhaps he would be willing to meet interested noble Lords before Report with a view to drafting an amendment or amendments that he might consider bringing forward or supporting.

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[Lord Hodgson of Astley Abbotts]

My Lords, I thank my noble and learned friend for that extensive reply and other noble Lords for their contributions to this debate.

I take issue with my noble and learned friend on two matters. First, it is perfectly possible for us to deal with the question of PPOs for mutuals by setting up a proper reinsurance programme. That could be done quite easily. Therefore, to say that we would like to do this but we cannot because mutuals cannot provide it is inaccurate. We can sort that out with a certain amount of technical help.

Secondly, the noble Lord, Lord Sharkey, said that we were engaged in a nudge. Personally, I am engaged in a bit of a shove, and I hope that the noble Lord, Lord Monks, will join us in in that shove. I am not sure that my noble and learned friend has given a shove; I think it is a very delicate pressure on the arm of the industry, which I am not sure will be effective.

We heard from the noble Earl, Lord Kinnoull, about how PPOs are declining in use and from the noble and learned Lord, Lord Woolf, about the culture and question of fairness, which must be at the heart of all our discussions. I was encouraged to think that such an eminent jurist as him should think that the rules of court could provide the flexibility to enable the issues covered by my amendment to be incorporated. We are in an era where things are moving fast, and we do not want to find ourselves stuck in inflexibility.

My noble and learned friend Lord Mackay of Clashfern referred to the question of interference by the Executive with the judiciary. I made clear that I was concerned about that in my opening remarks. The amendment is designed so that Parliament, the legislature, makes its view clear. It is nothing to do with the Executive. It is giving judges a steer, but after that, it is over to them how they proceed. My worry about my noble and learned friend’s comments is that the best remains the enemy of the good. We have a system that is not working very well, but we are saying, “This is frightfully difficult, so we should not change it; we are likely to cause more trouble by changing it than we solve, let sleeping dogs lie”.

The system is not working very well. The transfer of investment and longevity risk away from the individual has to be a key part of making matters fair. It deals with important and difficult cases of the sort raised by the noble and learned Lord, Lord Judge. I hope that the Minister will agree to meet some of us between now and the Bill’s next stage, because I do not think we have got to the bottom of this. We are missing an opportunity to do something seriously helpful for people who suffer long-term, life-changing injuries. In the meantime, I beg leave to withdraw the amendment.

[Lord Keen of Elie]

In response to my noble friend Lord Hodgson, and a point raised by the noble Lord, Lord Sharkey, I would be perfectly content to meet them before the Bill’s next stage to discuss this. If they contact my private office, that can be arranged.

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Moved by

[Lord Hodgson of Astley Abbotts]

61: Clause 8, page 8, line 14, leave out “within the 3 year period following the last review” and insert “if the procedure set out in sub-paragraph (3A) applies.
(3A) The expert panel under paragraph 5 must advise the Lord Chancellor to undertake a review of the rate of return when it considers that the nature of return on investment has changed sufficiently to justify such a review.(3B) Where a review under this paragraph has not taken place for a period of 12 months, the expert panel must report to the Lord Chancellor as to why it considers that no review is necessary.”

[Lord Hodgson of Astley Abbotts]

My Lords, I rise to move Amendment 61 and speak to Amendments 65, 69, 86, 90 and 91, which are consequential.

These are probing amendments, designed to tease out the Government’s thinking on the methodology for carrying out reviews of the discount rate. As I understand it, the Government intend that each review of the rate must commence within three years of the last review, irrespective of whether there have been changes in the underlying investment climate that would affect the varying rates of return on the sums awarded. I would suggest that time is not the right metric by which to settle a requirement for carrying out reviews. I agree with my noble friend Lord Faulks, who has an amendment in this group, that three years is too short in any case. I would respectfully suggest that a five-year period suffers the same strategic defects. Fixed or maximum periods will inevitably lead to an increase in attempts to game the system. My noble and learned friend the Minister will, I am sure, point out that three years is a maximum and reviews can take place more frequently.

In the world of practical politics, things will not work out like that. Changing the discount rate is a significant and potentially controversial decision. We only have to look at the immediate history, with the discount rate remaining unchanged for over 15 years during one of the biggest financial booms and busts that the world has ever seen. I believe that Lord Chancellors will be reluctant to implement the changes until forced to do so, so there will be a bunching of claims as the fixed period nears its end—whether it is three or five years—as defendants and claimants reflect on whether the upcoming review is likely to be to their advantage.

Perversely, a fixed-term system requires a review where there is no obvious reason to undertake one. If the Bill is planned to achieve fairness, a key objective must surely be to ensure that rate changes are made to reflect changes in the underlying available rates of return on investments as quickly and efficiently as possible. This group of amendments suggests a different approach, making the expert panel established under paragraph 5 of proposed Schedule A1 a permanent feature. At present, it is not: it is dissolved after each review under paragraph 5(3), which is deleted by my Amendment 90.

Amendment 61 imposes a new advisory duty on the panel to,

“advise the Lord Chancellor to undertake a review of the rate of return when it considers that the nature of return on investment has changed sufficiently to justify such a review”.

The decision to initiate the review remains with the Lord Chancellor, but he or she is given the comfort of a third party advising that a review is advisable. To ensure that paralysis does not overtake the panel, the second part of Amendment 61 requires that,

“where a review under this paragraph has not taken place for a period of 12 months, the expert panel must report to the Lord Chancellor as to why it considers that no review is necessary”.

How the expert panel would make that judgment is up to it. Bearing in mind that in the new world, investment should be assumed to be in lower-risk categories, there are multiple indices: gilts—not index-linked gilts, I hasten to add—or prime corporate bonds, which together can provide indication of changes in the likely available rates of return. All the other amendments in my name in the group are consequential.

To conclude, these probing amendments seek to move the undertaking of reviews of the discount rate from an arbitrary, time-based system to one that reflects events in the relevant real world—namely, changes in the available rate of return on investments. I beg to move.

[The Deputy Chairman of Committees]

I must advise your Lordships that if the amendment is agreed to, I cannot call Amendment 62 for reasons of pre-emption.

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In the light of these explanations and while understanding that these are generally probing amendments—Amendment 74 is just that, as the noble Lord, Lord Sharkey, observed—I invite noble Lords not to press these amendments.

[Lord Hodgson of Astley Abbotts]

My Lords, I am grateful to all noble Lords who have taken part in this wide-ranging debate. Perhaps I might return to Amendment 61, where we began 54 minutes ago, and say to my noble and learned friend on the Front Bench that the purpose of this amendment was to assist the Lord Chancellor, not to undermine him. It was designed to give him some air cover by somebody saying, “Oi! You need to be doing something about the rates of return”. There was no fixed term to this; they could turn up at any time and say that. The idea was that they would somehow do it every year, but it would not be. It could be more frequently if interest rates changed sufficiently to justify the rate going up and down.

A permanent panel would have a role. The noble Lord, Lord Sharkey, talked about the MPC, which is not the same sort of thing but it has a collective institutional memory. If you dissolve the panel after each time it sits, and start again de novo with the next review, that seems a waste of the experience, knowledge and know-how of making these things work that would be built up in the operation of a panel. My noble friend Lord Faulks said that it is a political decision and I agree. It is, which is why Amendment 61 says:

“The expert panel under paragraph 5 must advise the Lord Chancellor to undertake a review”.


It does not say that he must; it says that it must advise him and at that point the Lord Chancellor may say, “No thank you” and make his own decision.

Let us consider this situation. The Lord Chancellor has a wide range of duties so somebody will have to tip up one morning and say, “Lord Chancellor, it’s time you had a review of the rate”. Somebody in the MoJ will have to survey the rates of return available and the unlucky official who has to do that will know that it will be an unpopular thing to say because the Lord Chancellor will not want to get into the controversy of having to establish and justify a new rate. That will not be a popular moment, so the much more likely time for it to happen is when the unlucky official comes along and says, “Lord Chancellor, the three-year period”—or five-year period—“is coming to an end and you’ve got to do something”. We will have this series of events at the end of the period prescribed, depending on whether the Government accept my noble friend Lord Faulks’s amendment to have five years as opposed to three. I suggest that, from the point of view of efficiency, applicability and fairness, an expert panel being able to say to the Lord Chancellor, “It’s time we had a review” is a much better way to proceed and much more in keeping with the arrangements and purposes behind the Bill.

We shall obviously go no further on this tonight, but perhaps I can put it on the shopping list for when my noble and learned friend is kind enough to say that we can come and talk to him. In the meantime, I beg leave to withdraw the amendment.

Amendment 61 withdrawn.

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As I said, I am probing; the most basic point is the discrepancy between “different financial aims” in the Bill and “similar investment objectives” in the Explanatory Notes—it seems to me that the Explanatory Notes have got it right. Then there is the additional confusion over what happens because you also have the implications of the purposes in paragraph 3(3) of new Schedule A1 and the factors in paragraph 3(5). It would be useful to have an elaboration, or even some sorting out, of how that is all supposed to work.

[Lord Hodgson of Astley Abbotts]

My Lords, I will briefly support the noble Baroness, Lady Bowles of Berkhamsted, in what she just said. It is easy for us to overlook what quantitative easing has done to the returns on savings and fixed interest. It has been a much longer-running saga than was anticipated, and it is still carrying on. If we are to set up a system that precludes people investing in equities, which gives some protection against that, we will be doing no service to the people who need this money as part of the way to recover from terrible injuries they received. The last line on page 9,

“who has different financial aims”,

does not add anything at all to the situation and will merely provide fuel and funds for lawyers to discuss exactly what that means in cases in future years.

[Lord Keen of Elie]

I am obliged to all noble Lords for their contributions. The noble Lord, Lord McKenzie of Luton, began by referring to the briefing from APIL—the Association of Personal Injury Lawyers. I am familiar with it, and indeed, the association invited me to speak at its annual conference, where I confirmed that we would take the Bill through Parliament. I have not cleared my diary for next year. Much of what they had to say, which was repeated by the noble Lord, was, as the noble Earl, Lord Kinnoull, pointed out, met by the need to encourage the uptake of periodical payment orders. We are committed to that and we will take it forward in various ways. They need to be embraced more thoroughly, not only by claimants but by defendants —insurers—as well. Nevertheless, I make that point.

The noble Lord referred to the case of Wells v Wells, which has been mentioned before. There we saw the reference to what was essentially construed as “very low risk investment in UK gilts”, and we are moving away from that. However, there is an additional element in that, which is volatility: you have an investment portfolio which may be subject to volatility, and you may find that it is at a low point at a stage when you need to withdraw capital funds. That has to be factored in as well, and we appreciate all that.

On the suggestion that we are somehow inviting people to invest their savings, or a majority of them, in hedge funds, that will not do at all. The portfolio A that was examined included 13% UK equities, 15% overseas equities, and 18% of alternative investments which could be modelled as hedge funds. We have to see all this in context. We took clear evidence on the nature of a low-risk portfolio, and there was reference, for example, to widows and orphans, but we are in a different climate in this context. We are not seeking to move away from the idea of 100% compensation. I will come on to the probing amendment of the noble Baroness, Lady Bowles, on setting the rate by reference to not only a floor but, I suggest, a ceiling—there are reasons for that—and the question of investment objectives, as distinct from different financial aims.

Amendment 78 seeks to amend paragraph 3(2) of new Schedule A1 by removing the words,

“in the opinion of the Lord Chancellor”,

from the requirement that the Lord Chancellor must decide the rate on the basis that,

“the rate of return should be the rate that, in the opinion of the Lord Chancellor, a recipient of relevant damages could reasonably be expected to achieve”,

if he invested the relevant damages for the purpose of the assumed objectives. The effect of the amendment would be to prevent the Lord Chancellor seeking to justify a rate on the basis that it seems perfectly reasonable in his subjective opinion when, by any objective assessment, the rate proposed is not supportable.

The noble Lord referred to an “unfettered discretion” and conflict with a political interest, but we are talking about the Lord Chancellor making the decision in his capacity as Lord Chancellor. He does not have an unfettered discretion. He is subject to public law duties in the exercise of his functions. Any decision of the Lord Chancellor as to what the rate should be must be rational, and any failure in rationality can be challenged by way of judicial review. I have already touched upon that and the question of disclosure, and I shall not repeat it.

It is necessary to have reference to the opinion of the Lord Chancellor in relation to setting the rate because the setting of the discount rate is not now, and will not under the proposed legislation, be a precise science—it cannot be. The decision to be made on the rate will require the weighing of different potential outcomes for individuals in relation to a range of possible rates. An inevitable degree of subjective assessment is involved in this process. That is why it is appropriate that, although there is an expert panel, that subjective assessment is made by the Lord Chancellor, albeit with the reasons being given and explained, with a rational analysis of the information submitted to him.

Amendment 78A would require the Lord Chancellor to assume, when considering the damages to which the discount rate would apply, that the relevant damages would be payable as a lump sum or partly as a lump sum. The current wording of the Bill requires the Lord Chancellor to assume that the relevant damages will be payable wholly as a lump sum. We do not consider that this amendment is necessary. The discount rate will only ever be applicable to damages payable as a lump sum, and in setting the rate the Lord Chancellor will have regard to that.

Amendment 79 would include the requirement to assume, among the assumptions which the Lord Chancellor must make under paragraph 3(3) of new Schedule A1 in determining the discount rate, that the cost to the claimant of investment advice shall not be recoverable by way of damages. I appreciate the point made by my noble friend Lord Faulks about the need to be clear about how investment management costs are to be treated in setting the rate, but we do not consider that this amendment is necessary.

Paragraph 3(5) of the schedule provides for the Lord Chancellor to make such allowance for “investment management costs” as he thinks appropriate. This provision has been included on the basis that under the current law the cost of investment advice is not, for the reasons explained by my noble friend Lord Faulks, recoverable as a head of damages and therefore needs to be taken into account as a factor in setting the discount rate. Should the law change, an allowance in the setting of the discount rate would then become unnecessary, as the claimant would already have the benefit of the compensation for the costs. However, we understand that paragraph 3(5) reflects the current law and can adapt to changes in the law. Therefore, we do not consider that it casts doubt on the present law regarding the unrecoverability of investment costs as a head of damage. That is a feature of fixing the discount rate.

Amendment 80, tabled by the noble Earl, Lord Kinnoull, seeks to change one of the assumptions that the Lord Chancellor is required to make under paragraph 3(3) of the new schedule. Under the amendment, the recipient of the relevant damages would be assumed to invest in a diversified portfolio of investment grade listed debt securities rather than a diversified portfolio of investments. The range of investments to be assumed to be made and included in the diversified portfolio under the amendment is clearly narrower than that under the proposed assumption in paragraph 3(3)(c) at present.

The Bill does not restrict the investments that are to be assumed, save that the overall investment approach must be assumed to fall within the range of risk described in paragraph 3(3)(d). We consider that this approach avoids the rigidity of tying the assumptions to a single type of investment. The Lord Chancellor and the panel can therefore assess what the appropriate investments should be in the circumstance of the review. In making their assessment, the Lord Chancellor and the panel will have to have regard to evidence of how claimants actually invest and the returns actually available to investors. We consider that to be a more sustainable system for the future.

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Moved by

[Lord Hodgson of Astley Abbotts]

89: Clause 8, page 10, line 36, at end insert—
“( ) For the purposes of this paragraph, the Lord Chancellor may adopt the membership and work of an expert panel already established by the Lord Chancellor prior to this Schedule coming into force.”

[Lord Hodgson of Astley Abbotts]

My Lords, this is another “hurry up and get this thing done” amendment, as we discussed extensively earlier today, particularly on the group beginning with Amendment 58. During the course of the responses that my noble friends on the Front Bench gave in that debate and others, my horse was shot—not once but twice. Or at least it was wounded, so I will be very brief.

I suggest merely that as a Committee we agree that we wish to see the new system brought into effect quickly as possible. This amendment is designed as empower the Lord Chancellor to begin preparatory work on setting up the expert panel and putting it to work before Schedule A1 comes into effect. My noble friend Lord Hunt of Wirral, who unfortunately was unable to stay for the rest of the debate, has written to my noble and learned friend on the Front Bench about this, citing precedents of where it has proved effective in the past to get things moving quickly, and the Minister has acknowledged those particular suggestions.

I hope that the Government will work in parallel and not end-to-end, because that will enable us to shorten the period by bringing this new system into effect. The whole discussion around Amendment 58 was about the length of time that it could take. The quicker we can find ways to shorten the proceedings the better, and this amendment might take a couple of months off that procedure if we can get the expert panel in place now. I beg to move.

[Lord McKenzie of Luton]

My Lords, we support the thrust of this amendment. Matters would have been helped had there been a stand-in panel in the first place.

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[Lord Hodgson of Astley Abbotts]

I am grateful to my noble friend, but I am less reassured—my horse has got up and started moving around again. I thought it had been shot but in fact it has not. “As soon as possible”, “as quickly as possible”, “we shall be working on it”, “we’ll do everything we possibly can”, “there’s no question of delay”, and, “we have procedures to go through and we’ll have to take evidence”—all this sounds like things are being slowed down again and the very thing that we were driving at in the amendment has been run into the rails, to continue with my horseracing metaphor. However, the hour is late and I beg leave to withdraw the amendment.

Amendment 89 withdrawn.