European Union (Withdrawal) Bill

Lord Hodgson of Astley Abbotts Excerpts

Committee: 8th sitting (Hansard - continued): House of Lords
Monday 19th March 2018 Lords Chamber

Moved by

[Lord Hodgson of Astley Abbotts]

238: Schedule 7, page 45, line 23, at end insert—
“Parliamentary committees to sift regulations made under section 7, 8 or 9 and the super-affirmative procedure
3A_(1) This paragraph applies if a Minister of the Crown—(a) proposes to make a statutory instrument to which paragraph 1(1), 6(1), or 7(1) applies, and(b) is of the opinion that the instrument should be subject to approval by resolution of each House of Parliament (“the affirmative procedure”). (2) Before laying a draft of the instrument, the Minister must lay before both Houses of Parliament a memorandum setting out the reasons for the Minister’s opinion that the instrument should be subject to the affirmative procedure.(3) The affirmative procedure applies unless, within the relevant period, either House of Parliament requires the super-affirmative procedure to apply, in which case the super-affirmative procedure applies.(4) A House of Parliament is taken to have required the super-affirmative procedure to apply within the relevant period if—(a) a committee of the House charged with reporting on the instrument has recommended, within the period of 10 sitting days beginning with the first sitting day after the day on which the memorandum was laid before the House, that the super-affirmative procedure should apply, and(b) that House has not by resolution rejected the recommendation within a period of 5 sitting days beginning with the first sitting day after the day on which the recommendation is made.(5) For the purposes of this paragraph—(a) where an instrument is subject to the super-affirmative procedure, it may not be made unless the procedures set out in paragraph 3B have been followed,(b) “sitting day” means, in respect of either House, a day on which that House sits.(6) Section 6(1) of the Statutory Instruments Act 1946 (alternative procedure for certain instruments laid before Parliament) does not apply in relation to any statutory instrument to which this paragraph applies.”

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, this is the graveyard shift, but graveyard shift or not I shall speak also to Amendment 239. It is my first contribution in Committee on this Bill and when one finds one’s amendment sandwiched between ones being moved by such luminaries as the noble Lord, Lord Lisvane, and my noble friends Lord Norton of Louth and Lord Lexden, one needs to proceed with a certain degree of care. In these amendments I return to an issue I raised at Second Reading; namely, the weaknesses of the procedures for scrutinising secondary legislation, which the noble Lord, Lord Tyler, talked a great deal about very fluently in his contribution a few minutes ago. In my view, in the very special circumstances that prevail with respect to this country’s departure from the European Union, I was concerned that, maybe inadvertently, there could be what is vulgarly called a power grab by the Executive during this process of redrawing our relationship with the EU and refocusing our legal and regulatory structure on a UK-centric basis.

In part, these amendments may serve to address some of the issues, and concerns raised in earlier debates; notably by my noble friend Lady Neville-Rolfe in Amendments 249 to 251, which we were debating in the early hours of last Tuesday morning. As I say, my fundamental concern remains the weakness of our procedures for scrutinising secondary legislation. The noble Lord, Lord Sharkey, referred to what he graphically called the nuclear option, which is really the only option open to us. Not surprisingly, while Members of your Lordships’ House will finger the nuclear button—sometimes even lovingly finger the nuclear button—they have proved rather reluctant to press it. I am not a lawyer, nor am I an expert on parliamentary procedure, so I need to place on record my great thanks to the Public Bill Office of your Lordships’ House for helping me give legal form to my practical objections. Therefore I do not pretend that Amendments 238 and 239 are perfect: they are of course at this stage probing amendments, not least because I expected that my noble friend the Leader of the House would have some words to say today about the evolving position of the scrutiny of Brexit secondary legislation.

None the less, the purpose behind my amendments is to give the Committee a chance to discuss a possible new procedure that might be described as a sub-nuclear option; a new super-affirmative procedure to be available for use where particularly significant statutory instruments are being discussed. In establishing this new procedure I have sought to achieve a balance between, on the one hand, the need of the Government to have a reasonable chance of getting their business through—as we have heard in earlier debates tonight, it would surely be irresponsible for us not to have the proper legal practice in place on D-day, therefore the Government need some protection against capricious behaviour—and on the other hand, to give either or both Houses of Parliament the means to require the Executive to think again, and to do so over a timescale that allows public and other opinion to be aroused, discerned and tested, thereby reducing the possibilities of mission creep.

Finally, the think-again option should be limited to regulations concerning this country’s withdrawal from the European Union, so it has an in-built sunset clause. My thinking has been informed, to some extent, by the time I served as a member of the Secondary Legislation Scrutiny Committee of your Lordships’ House. So, with that, to horse!

--- Later in debate ---

[Baroness Goldie]

At this time of night my reading qualities are not at their most alert. May I look at that in more detail and revert to my noble and learned friend?

[Lord Hodgson of Astley Abbotts]

My Lords, I thank my noble friend for her reply. She short-changed herself in only one sense: that was that the noble Lord, Lord Adonis, described her as mellifluous. Never was she more mellifluous than in dealing with the noble Lord, Lord Beith, and my noble friend Lady McIntosh. The hour is late; we have had a long and helpful contribution from my noble friend the Leader of the House which demands careful scrutiny, so all that I would like to do now is to thank all those who participated in this short debate. I beg leave to withdraw the amendment.

Amendment 238 withdrawn.

Damages (Personal Injury) Order 2017

Lord Hodgson of Astley Abbotts Excerpts

Tuesday 18th July 2017 Lords Chamber

Moved by

[Lord Hodgson of Astley Abbotts]

That this House regrets that the Damages (Personal Injury) Order 2017 makes a substantial change to the Ogden rate, the first change since 2001, just before the completion of a further consultation on how to set that rate more effectively in the future (SI 2017/206).

Relevant document: 29th Report from the Secondary Legislation Scrutiny Committee, Session 2016–17

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, the regret Motion I have tabled may appear dry, complicated and technical. It is technical and complicated but it is not dry. It will have practical, everyday consequences for every taxpayer, for everybody who has an insurance policy, especially if they drive a motor car, and for every person who receives a long-term award of damages following an accident.

The setting of the discount rate to be applied to lump-sum damage awards is a critical decision. On the one hand, the situation cannot be allowed where, because the discount rate has been set too high, someone who suffers a catastrophic injury, maybe as the result of a road accident or an NHS operation going awry, finds that the lump sum runs out too soon. On the other hand, setting the rate too low means that the accident victim is overcompensated, which has a knock-on effect on motor and other insurance premiums, and on the overall operating costs of the NHS.

While the power for the Lord Chancellor to set the discount rate is to be found in the Damages Act 1996, the process by which the rate is set is based on case law, in particular on the 1998 House of Lords judgment in Wells v Wells, which reached two important conclusions. First, any lump sum awarded should neither overcompensate nor undercompensate the unfortunate victim. Who could possibly disagree with that conclusion? Secondly, the legal judgment was that the appropriate benchmark for setting the discount rate should be the yield on index-linked government stocks—that is, index-linked gilts or ILGs. I understand that the court concluded that the sums paid in compensation should be invested only in what the court saw as risk-free assets. The court appeared to anticipate that 100% of every amount paid in compensation would or should be invested in index-linked gilts. In such circumstances, it is not surprising that the conclusion was drawn that the benchmark for setting the discount rate should be that on index-linked gilts.

That second conclusion, 20 years on from the Wells v Wells judgment, is a good deal more controversial than the first, for the following reasons. First, the supply of index-linked gilts is limited. They offer particular attractions to those insurance companies and other financial institutions that seek perfect risk-matching. As a consequence, index-linked gilts tend to be fully priced—some may say overpriced—and arithmetically, as a result, the running yields are driven down. Many index-linked gilts are today traded above par so that a capital loss on redemption is inevitable. Further, if portfolio theory teaches us one thing, it is that diversification is the best way to offset risk. Any proposal that suggests investing in only one asset class needs to be approached with care. It is the all-your-eggs-in-one-basket belief. A more conventional approach might suggest, in addition to index-linked and other gilts, investing in some prime corporate bonds and some blue chip UK or overseas equities.

This rate setting is such a sensitive issue that successive Governments have shied away from changing the rate. Until earlier this year, the discount rate was set at 2.5% and had not been changed since 2001. That is patently unfair. The shape of the yield curve has altered dramatically as a result of the 2008 financial crisis and interest rates remain at historic lows. I am afraid that, as a result of the failure by successive Governments to address this issue, victims may prove to have been undercompensated in recent years.

Then suddenly, essentially out of nowhere, in February the then Lord Chancellor took action. And my goodness, it was draconian. At a stroke, she changed the discount rate from plus 2.5% to minus 0.75%. What is the effect of this rather arcane statement? A simple example may help clarity. Let us assume that you are a 25 year-old young man who has, sadly, been catastrophically injured in a motorcycle accident. The court must consider what sum is needed to look after you for the rest of your life—that is, probably more than 40 years. If the court concluded that on the old rate a sum of £2 million was sufficient, under the new rate that sum would arithmetically need to be £7.3 million. That is an increase of more than £5 million, or more than triple the original sum. Of course, the award assumes that interest rates will stay at the present low—historically, very low—level for the rest of your life. If they begin to rise, you will have been overcompensated at the expense of the taxpayer and other insured people.

Specifically, the Lord Chancellor’s decision had a direct and substantial effect on the public finances. Box 4.2 in the spring Budget policy costings paper indicates that as a result of this decision, the Chancellor of the Exchequer will have to find an additional £1.2 billion every year for the next five years as a guard against future claims. On page 35 of the same report, the suggestion is that the Lord Chancellor’s decision will result in an increase of 0.1% on CPI, or 0.2% on RPI.

The Times of 28 February this year, while pointing out the importance of not undercompensating victims, said:

“But basing the so-called Ogden formula on just three years’ history of index-linked gilts is crazy, as insurers point out. No accident victim in their right mind would invest their entire lump sum in inflation-protected gilts in this era of superlax monetary policy. One-third now opt for ‘periodic payment orders’, which guarantee a return of at least zero in real terms. Most others invest in a mix that includes higher yielding corporate bonds and equities”.


It went on to say:

“Either way, assuming that the best a prudent investor can achieve is a long-run real return of -0.75 per cent displays an Eeyorish level of pessimism. If this is really the government’s official thinking on likely future investment returns then its policies to encourage pension saving amount to mis-selling on a gigantic scale”.


More recently, on 24 June, the same paper highlighted that drivers now face a rate of increase in the cost of their motor insurance that is five times that of inflation. Not all of the increase can be attributed to the change in the discount rate but its impact will be felt particularly by younger drivers, those under 25, who have seen an increase of 13.1%, and—this may be of more interest to Members of your Lordships’ House—to older drivers, those over 50, who have seen an increase of 17.9%. Of course, this rate of increase will continue as reinsurance contracts run off—they last for only 12 months before they have to be renewed, and will have to be replaced at the higher rate.

I suspect—perhaps I should say I hope—that the Lord Chancellor did not understand or was not properly briefed or advised on the likely full impact of her decision. Certainly, having made this dramatic decision on Monday 27 February, which led to a storm of controversy, she then announced that there would be a further consultation. As my regret Motion makes clear, this appears to be putting the cart before the horse. I understand that the consultation is now closed and the MoJ has to report back by 3 August.

A regret Motion is probably not the place to discuss a remedy in detail but perhaps three brief conclusions can be drawn. First, it is critical that accident victims are properly compensated but in future the discount rate needs to be renewed more frequently to minimise the risk of overcompensation or undercompensation. This will also avoid the massive jerks on the tiller which have so disconcerted the insurance industry this year. Secondly, any new system should recognise that an assumption that all the compensation sums will be invested in the same asset class fails to account for the different circumstances of the various injured parties, so that the Wells v Wells conclusion that investments should be ILGs only is no longer appropriate. Thirdly and finally, those parties that are very risk-averse should place increased reliance on periodic payment orders as a better means of offering security to the injured party while avoiding overcompensation or undercompensation.

While tonight the House cannot discuss any remedies in detail, there is a need for action quickly to right the costly inequities of the present system. Following the recent consultation, the Government now have a wealth of information at their disposal. They also have a legislative vehicle on the stocks in the shape of the civil liability Bill announced in the Queen’s Speech. When the Lord Chancellor herself said, as she did on 7 March, that,

“the system needs to be reformed, because I do not think it is right that a discount rate is set on an ad hoc basis by the Lord Chancellor”—[Official Report, Commons, 7/3/17; col. 657]—

we can surely all agree that action is needed, and quickly. When he comes to reply, I hope that my noble and learned friend will be able to reassure me and the House that the Government recognise the significance of this issue and intend to take remedial action shortly. I beg to move.

[Lord Beecham (Lab)]

My Lords, the noble Lord has done the House a service in raising this issue. I should refer to my interests as an unpaid consultant in my old firm of solicitors, which specialises in personal injury claims.

The changes effected by the order we are debating have been a long time in the making. As the Explanatory Memorandum to the order makes clear, the procedure was prescribed in the Damages Act 1996, which vested in the Lord Chancellor the power to prescribe a discount rate which the courts must consider—though not necessarily apply—when determining compensation in personal injury cases in the form of a lump sum. Until that time, the rate had been determined by the courts.

This is only the second occasion since 1996 when a change has been made. As we have heard, the rate has been reduced from 2.5% to minus 0.75%. The purpose of the order is to reflect in relation to awards of lump-sum damages in cases of significant monetary loss—for example, long-term loss of earnings or the cost of round-the-clock care—the average yield of index-linked gilts, as the noble Lord, Lord Hodgson, explained. Thus the damages awarded will reflect a rate of return which is designed to ensure that the claimant does not make a profit from the compensation but is adequately provided for.

In 2010 the then Lord Chancellor, Kenneth Clarke, initiated the process of a review and a consultation was launched in 2012 that was inconclusive. It was followed in 2015 by the report of an expert panel commissioned by Chris Grayling. A further 16 months elapsed before Mr Grayling’s successor but one consulted the Treasury and the Government Actuary, and the relevant order was finally made. Over time it became apparent that the 2.5% discount did not reflect the realities of a changing investment market, such that the compensation could run out or the injured party have to invest in higher-risk products.

Needless to say, the insurance industry has opposed the changes and claims that they will lead to higher premiums. This is par for the course for an industry that in recent years has done so much to increase its profits, not least by persuading the Government to effect changes in the realm of personal injury claims while making little, if any, reduction in premiums. APIL, the Association of Personal Injury Lawyers, reports that Admiral Insurance stated that motor insurance profits after the change would still be of the order of £336 million. APIL commended the statement in the Government’s consultation that they could be influenced by the effect of the change in the rate on defendants.

Another organisation, Hastings, said that the reduction,

“is not expected to have a material impact on the Group’s financial outlook for 2017”—

so that is one insurer not apparently overconcerned at the change. Even more illuminating is the figure which Thompsons Solicitors calculated as the saving to motor insurers during the last 10 years of the 2.5% rate—a staggering £30 billion. There is little or no evidence that this has been reflected in reduced insurance premiums.

Given the nature of the claims in question, where long-term losses of income can occur alongside a need for special care, home or vehicle adaptations and the like, periodical payment orders—rather than one-off lump-sum payments—may well feature increasingly in the award of damages or the terms of settlement of claims. The noble Lord alluded to that desirable move.

--- Later in debate ---

[The Advocate-General for Scotland (Lord Keen of Elie) (Con)]

My Lords, I thank my noble friend Lord Hodgson for tabling the Motion on this important topic. I welcome the valuable contributions that he and other noble Lords have made.

As has been observed, the discount rate to be taken into account by the court in determining the rate of return to be expected from the investment of a lump sum award of damages for future pecuniary loss caused by a personal injury is set for England and Wales by the Lord Chancellor under Section 1 of the Damages Act 1996. This is colloquially referred to sometimes as the Ogden rate as in practice it is applied through the actuarial tables published by the working group originally set up by the late Sir Michael Ogden.

As noble Lords have observed, the rate plays a key role in underpinning one of the core principles governing the law of damages. Claimants who have suffered injury as a result of another person’s negligence must be compensated fully for their loss, and should be placed—as far as is possible in financial terms—in the position that they would have been in but for the injury. This is known as the principle of full compensation or the 100% rule. Under this principle, the aim of an award of damages is therefore to compensate claimants fully, but not to overcompensate them or undercompensate them.

To fulfil that aim, where damages are awarded for future pecuniary loss—such as future loss of earnings or the care costs that are going to be incurred—in the form of a lump sum, the award is, and must be, adjusted to take account of the benefit to the claimant of being able to invest the money before the loss or expense in respect of which it is awarded has actually occurred. The discount rate is the factor applied to the award to make this adjustment so that it represents the expected rate of return. The court, of course, has a power to apply a different rate but, as my noble friend Lord Hodgson noted, it has almost always applied the prescribed rate in these circumstances.

The Damages Act 1996 does not specify when the rate should be reviewed. However, the Lord Chancellor is under a continuing duty to ensure that it is not set at an inappropriate level. The rate was set in 2001 on a certain basis. Thereafter, there was consultation on the legal framework for setting the rate. Indeed, in 2013, a consultation was carried through but reached no consensus as to any changes or proposed changes to the legal framework for setting the discount rate. So, as at 2013, the coalition Government, of whom the noble Baroness, Lady Kramer, was a member, took no steps to deal with what she referred to as a preposterous state of affairs. Indeed, it was not at that time a preposterous state of affairs.

In 2015, an expert panel advised with regard to the matter of the rate. But in all these circumstances, when it came to 2016 and the beginning of 2017, the then Lord Chancellor had an existing duty to address the adequacy or otherwise of the discount rate. That was her legal obligation. In the light of that duty, she announced on 27 February this year that the rate should be changed from 2.5% to minus 0.75% with effect from 20 March 2017. I note that the Scottish Government made the same change to the discount rate about a week later on 28 March 2017. The then Lord Chancellor also undertook to review the framework under which the rate is set to ensure that it should remain fit for purpose in the future. The consultation paper she promised was published on 30 March. It sought views on a range of issues, including what principles should guide how the rate is set; whether the existing methodology is appropriate for the future; whether the power to set the rate should remain with the Lord Chancellor or move elsewhere, possibly to an expert panel; whether more frequent reviews would improve predictability and certainty for all parties—a point raised by a number of noble Lords—and whether further steps should be taken to encourage the use of periodical payments orders instead of lump sums, a point touched on by the noble Lord, Lord Beecham.

Underlying the consultation was the wish of the Government to make sure that the way the rate is set is put on the firmest possible footing in future, so that we have a better and fairer system for claimants and defendants, and, in so doing, keeping true to the 100% principle—namely, that claimants are paid no more but no less than they should be. The consultation closed on 11 May and the Ministry of Justice is currently analysing the 135 responses received, which, as might be anticipated, reflect a broad range of opinion as much as they reflect a broad range of interests. This requires considerable care and thoroughness, as many of the responses are highly complex and contain detailed technical information on investment returns and investor behaviour, something the noble Baroness, Lady Kramer, pointed out could be quite diverse and divergent in particular circumstances.

It is not for me to anticipate the outcome of the consideration of the consultation, but I seek to assure my noble friend and other noble Lords who have spoken in the debate that an announcement of the Government’s conclusions will be made at the earliest possible opportunity. Of course, the interests of all parties concerned will be considered, and there will be an impact assessment.

My noble friend’s Motion is, however, directed at the change of rate rather than the outcome of the consultation. His argument is that the then Lord Chancellor should not have set the rate at a time when she had decided that a further consultation exercise was to take place on how the rate should be set in the future. I venture that this argument is not well founded. As I have explained, the Lord Chancellor is under a continuing duty to ensure that the rate is set at an appropriate level. This means that once the then Lord Chancellor reached her decision on what the appropriate rate should be, she was legally obliged to put that decision into effect. The option of delaying setting the rate until the outcome of the planned consultation was known was simply not available to her.

My noble friend’s regret that the then Lord Chancellor carried out her duty is therefore, I respectfully suggest, misplaced. The then Lord Chancellor acted correctly both in changing the rate and in initiating a consultation on whether there is a better or fairer way for it to be set in future. Had the Lord Chancellor adopted the approach proposed by my noble friend and delayed a change in the rate until a consultation—and no doubt any consequent change in the law—had been complete, she would have knowingly maintained an inappropriate rate for what might have been a considerable period of time. That would have been in breach of her legal obligation with respect to the setting of the rate.

Consequently, the approach taken by the Lord Chancellor was correct in law. In these circumstances therefore, the Government cannot support my noble friend’s Motion, and I hope that he will feel able to withdraw it in light of the explanation I have sought to give on behalf of the Government.

[Lord Hodgson of Astley Abbotts]

My Lords, the hour is late so I will be brief. I thank all noble Lords who have spoken in support of this regret Motion: the noble Baroness, Lady Kramer, for her forthright support; I think I got half or maybe two-thirds of a loaf—I am not quite sure but I will settle for half—out of the noble Lord, Lord Beecham; and I thank my noble friends Lord Faulks and Lord Hunt for their support. They speak from a position of a great deal more expertise than I will ever have.

Of course awards need to be fair, and I do not argue at all with the first arm of the Wells v Wells judgment, that it must not undercompensate or overcompensate; it must be fair. As my noble friend Lord Faulks mentioned, there was this sensation around that this is an attempt by insurance companies to boost their profits. If we leave that aside, over the next five years there will be £6 billion less in the National Health Service, which would have been used for looking after patients and carrying out the essential work that the NHS does, as a result of this decision and as provided for in the recent budget development.

I appreciated my noble and learned friend’s teaching on recent developments as regards the setting of the discount rate. His defence of the then Lord Chancellor was stout in the extreme. It is extraordinary that in 2017 the then Lord Chancellor suddenly felt that she had a duty when her predecessors in all the years since 2001 apparently thought that they did not. However, he made a good fist of quite a tricky brief—although I know that, as an expert barrister, he will be long used to and practised in that.

I am pleased to hear that there have been 135 responses to the consultation and that the Government are analysing them. I thought I got a slight Nelsonian wink that we might expect some developments in this area. I hope very much that that assumption is correct, as we have to deal with this running sore. However, we can take it no further this evening, and I beg leave to withdraw my Motion.

Motion withdrawn.