UK: The Damages (Investment Returns And Periodical Payments)(Scotland) Bill

Last Updated: 27 July 2018
Article by Laura McMillan and Emma Dyson

The Scottish Government has published The Damages (Investment Returns and Periodical Payments) (Scotland) Bill which proposes changes to (i) the Discount Rate in personal injury cases in Scotland to reflect similar changes being made in England & Wales and (ii) Periodical Payment Orders (PPOs).

Purpose of the Bill?

The Bill has been introduced, in part, to tackle criticisms of the prior methods for setting the Personal Injury Discount Rate in 2017 (for background see previous Brodies' updates here and here.)

What is the Discount Rate?

The Discount Rate only applies in personal injury cases where there are future losses which require to be met - such as care costs or wage loss. The Discount Rate adjusts the compensation awarded to reflect the fact that it is available to be invested before the loss or expense for which it is awarded has actually occurred.

The current Discount Rate is -0.75%. That means that, at the moment, an award for future loss is increased by the application of the Discount Rate - and so the term "Discount Rate" is a misnomer. "Assumed rate of return" as it is referred to in the Bill is a more accurate description.

What were the views of stakeholders?

The Scottish and UK Governments jointly consulted in 2017 in relation to the Discount Rate. The consultation posed three questions: how the rate should be changed, when and by whom?

Responses were received from, amongst others, solicitors representing claimants/pursuers and defenders; actuaries; underwriters and various health bodies. Most responses considered that legislation relating to the Discount Rate required clarity, transparency, certainty and the avoidance of conflicts of interest. The policy objectives of the Bill seek to tackle these concerns.

What does the Bill propose?

The Bill proposes:

1. To establish a timeframe for review of the Discount Rate by the Government Actuary.

There would be a review of the Discount Rate every three years, with a possibility of earlier review if necessary. The review will be carried out by the Government Actuary who will determine whether the rate should remain as it is or be altered. The Government Actuary is a non-ministerial role which allows unbiased review.

2. To put in place a new statutory regime for calculating the Discount Rate which should be applied to future pecuniary losses for personal injury cases;

The current approach taken in Scotland is based on deeming claimants as very risk-averse investors. The consultation sought views on this and found a move away from this approach would avoid over-compensation. Damages are meant to have the purpose of putting a claimant back in the position they would have been but for the injury happening - not for surplus funds which can be speculatively invested. The Schedule to the Bill sets out a new framework based on the rate being applicable to a "notional investment portfolio" which is owned by a "hypothetical investor." This "portfolio" includes cash, property and other mixed low risk investments.

The "hypothetical investor" is seen to be the recipient of the damages who will invest the sum as advised - someone who has no prior award of financial damages, who will withdraw from the investment and whose objectives are to ensure the damages meet the losses and expenses for which the damages are awarded. The "hypothetical investor" will have no other funds or income and relies solely on the lump sum to meet their needs.

In determining the Discount Rate on a sum awarded, the court must take into account the Discount Rate set by the rate-assessor. The rate-assessor is also the Government Actuary, although courts can apply for an alternative rate in individual circumstances where this is appropriate. The rate-assessor can seek advice and views from who he/she chooses in determining the Discount Rate.

3. To give the courts the power to impose, without the consent of parties, periodical payment orders (known as PPOs) for future pecuniary loss.

Aside from the Discount Rate, the Bill also proposes to grant authority to the Scottish courts to impose a PPO without the consent of parties – again bringing the Scottish courts in line with England & Wales. Currently, PPOs can only be established with the consent of both parties.

Lump payments tend to over or under-compensate a claimant as predicting a person's life expectancy is notoriously difficult and may not always reflect a claimant's needs. PPOs can help tackle this issue. The Bill will provide that the court must be satisfied that the continuity of payments is secure. If there is a material change in the claimant's circumstances the Bill allows the court to vary or suspend the PPO order or agreement. Similar provisions exist in England & Wales and Northern Ireland, although they have rarely been tested.

What Next?

The Bill is to be scrutinised by the Scottish Parliament's Economy, Jobs and Fair Work Committee. Responses are to be expected by August. The Bill is expected to come into effect in 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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