Damages (Personal Injury) Order 2017

Lord Faulks Excerpts

Tuesday 18th July 2017 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I congratulate the noble Lord, Lord Hodgson, and thank him for bringing forward his regret Motion on this order. So much of the detail has been described to the House that I am not going to repeat it, but there can be almost no one who looks at a discount rate of minus 0.75%, even for a risk-free investment, who does not come to the conclusion that the number is simply preposterous. For the Government to implement a result that is preposterous seems to me entirely inappropriate, not just for this Government but for any.

For many years I was a banker. There were times when it was necessary to price instruments, and I would turn to one of the junior bankers who worked with me and ask them to go away, go through the analysis and come forward with a conclusion. You would find one or two who were wedded to a particular formula that had been brought to their attention at some point during their training, and were absolutely certain that by applying the formula they would come to an appropriate result, even though when one looked at the result it was completely inappropriate for the situation and the purpose. That is what we have here: an allegiance to a formula—which was probably the wrong formula from the day that it was brought in but is certainly an inappropriate formula today—that the Government are insisting on applying simply because it is the existing formula. Frankly, I can think of no worse way in which to manage any aspect of finance in this economy.

The Government may take the view that the impact of making a preposterous and inappropriate decision does not matter very much. I think that it does, as I think does most of this House. Of course it is crucial that anyone who has been severely injured and is awarded damages over a long period should not be undercompensated, but there is no rationale either for overcompensation. If I understand correctly, this does not change the award; it is with the translation of the award into a lump sum that the discount rate comes into play.

The impact on insurance premiums matters. I admit that I am less concerned about the profits of insurance companies than about the impact of rising insurance premiums on many of the people who have to take out insurance. The noble Lord, Lord Hodgson, referred to young people who are now having to pay significantly more for motor insurance. It has been proposed that the price could be as much as an additional £1,000 a year, a very significant sum. We have already seen a significant rise in insurance premiums, partly due to changes in the Government’s tax regime. I point out to the noble Lord that if you are a young person living in a rural community you may have no choice but to drive if you want to have a job and go to school, as we have cut back on rural bus services, so there is an ongoing impact that is quite significant.

There is also very little discussion of the impact on various different departments. I think that the MoD suffers badly from this change in the discount rate, although I have no idea what the figure is. Presumably the National Health Service is impacted significantly as well. All that rolls back on the taxpayer, so there are real implications of getting the discount rate wrong.

I do not understand why the Government persist in applying a formula that they know is entirely inappropriate and comes up with a preposterous result, particularly when they have almost completed a consultation, with a review to follow which, we hope, will mean that they go back to the drawing board in a matter of weeks to try to right this set of wrongs.

I would become very angry with a junior banker who blindly applied a completely inappropriate formula. When it is a Government blindly applying a completely inappropriate formula, it begins to be unforgivable.

[Lord Faulks (Con)]

My Lords, I congratulate my noble friend Lord Hodgson on bringing these matters to the attention of the House. I ought to preface my few comments by declaring an interest: I am a practising barrister and much of my practice is concerned with the application of the discount rate in calculating damages. Some of my clients will benefit from this and others will not, but I hope to be able to stand back to make a few general comments about the appropriateness —or, I fear, the lack of it—of the proposed changes.

As several noble Lords have pointed out, this came about in rather unusual circumstances. The noble Baroness, Lady Kramer, is quite right: it is adherence to a formula which is inappropriate. There may be some internal mathematical integrity about the exercise, but it bears little relation to the proper approach to the assessment of damages. We approach them on the basis that there should be full compensation, and nothing that I say should derogate from that—we think that claimants ought to be properly compensated—but how do we assess what the compensation should be?

It has always been said that by giving a claimant a lump sum, the one thing you are certain about is that the damages will be inappropriate. Either the sum will be too much, because the claimant dies earlier than expected, or it will not be enough. Either way, that is undesirable. That is one reason why judges often said that it would be much better for there to be periodical payments. From about 1996, periodical payments became part of the picture. With great respect, I rather disagree with the noble Lord, Lord Beecham, who seemed rather to distance himself from the advantages of periodical payments. Perhaps he did not—he was referring to the Law Society’s dislike of the overreliance on periodical payments.

If we are to approach the assessment of compensation on the basis that claimants should not be taking too much by way of risk, surely periodical payments offer a significant advantage. For example, the largest head of damage is often the future cost of care for a badly damaged claimant. Most claimants nowadays will seek periodical payments. Sometimes the cost may be £100,000 or even £200,000 for a long life, and life expectation has been increasing, particularly for brain-damaged babies and others severely affected. Periodical payments provide security, but if claimants are now to say, “No, I would prefer to have a lump sum”, they are, as it were, saying, “I do not want the security provided by periodical payments”. What then is the sense of awarding damages on the basis that they are an entirely risk-free investor? That simply does not make any sense.

The noble Lord, Lord Beecham, referred to the often somewhat unedifying disputes that exist between claimants’ lawyers on the one hand and insurers on the other. I distance myself from that and concentrate on the position of the NHS. The noble Baroness, Lady Kramer, referred to the MoD. The NHS will feel the effects of this measure very considerably. Speaking to a colleague of mine, a schedule of damages was priced before the discount rate operation at £9 million. It is now £23.5 million. Very often a standard brain-damaged baby case might have been on a lump sum calculation £10 million; it is now going to be £30 million. That is partly because life expectation of those claimants has vastly increased, but it is a result of the discount rate alteration.