June 19, 2018

Scotland: Discount Rate reform proposals published

The Damages (Investment Returns and Periodical Payments) (Scotland) Bill sets out proposals for a new formula in setting the Discount Rate in Scotland.

The Scottish Government has published the Damages (Investment Returns and Periodicial Payments) (Scotland) Bill ("the Bill"). The Bill proposes changes to the discount rate applied to personal injury cases in Scotland, and also provisions relating to periodical payments.

The Bill aims to address concerns that the current process for establishing the Discount Rate is unclear with no clear timescales for reviews to be undertaken. It will establish a system similar to that recently proposed in England and Wales via the introduction of the Civil Liability Bill.

Discount Rate

How should the rate be set?

The Bill sets out a new framework for setting a Discount Rate in Scotland, which will be inserted into the Damages Act 1996.

The framework is based on the rate being applicable to a “notional investment portfolio” which is made up of a mix of assets including cash, UK and overseas equities, property and gilts. Scottish Ministers may, via regulations, add, remove or modify the examples within the notional portfolio or the percentages of a type of assets within the portfolio.

The framework also relies on the notional portfolio being "suitable for investment in by a hypothetical investor". This hypothetical investor is defined as follows:

  • a recipient of damages who will invest the damages, and do so as properly advised;
  • someone who has no financial resources, apart from the damages, that can be used to meet the losses and expenses for which the damages are awarded, and will make withdrawals from the investment fund deriving from investment of the damages;
  • someone whose objectives are to ensure that the damages will meet the losses and expenses for which the damages are awarded, and will be exhausted at the end of the period for which the damages are awarded.

Interestingly, the Bill does allow the Scottish Ministers to require by regulations that more than one rate of return be established. Should more than one rate of return be required, then each rate of return will undergo the process of review prescribed by the Bill.

The ability of a Court awarding damages to ignore the rate of return set by the rate-assessor, and "take a different rate of return into account" will remain if appropriate.

Who should set the rate?

The Bill confirms that the official 'rate-assessor' will be either the Government Actuary (or Deputy should that role be vacant) or a person appointed in place of the Actuary. It should be noted that the Government Actuary is a UK Government position.

Section 4(1) sets out the provisions establishing the conduct of the rate-assessor when determining the rate of return. The rate-assessor must give regard to those views from those he/she chooses to consult or seek advice from, provided those views are provided in good time.

Once the review is undertaken, the rate-assessor will be required to conclude and send a report to the Scottish Ministers within 90 days of the commencement of the review and will include:

  • The rate determined to be appropriate
  • A summary of the calculations made in determining the appropriate rate
  • Supporting or explanatory material

The report will be published on the day it is laid before the Scottish Parliament by the Ministers.

The referral of the decision to a sole rate-assessor stands in marked contrast to the proposals for England and Wales, where the Lord Chancellor will set the rate in consultation with an expert panel consisting of the Actuary and 4 others with relevant experience.

However, the process proposed for England and Wales does not define a notional portfolio, and the defined parameters to be established in Scotland may make it easier for the rate-assessor to assess the impact of a rate change, as opposed to the English/Welsh system requiring the expert panel to consider the impact of differing portfolios.

With the Actuary at the heart of the decision making panel in England and Wales, it is entirely possible that should the Actuary be the rate-assessor in Scotland, then he/she may consult with the expert panel on the Scottish rate, potentially minimising the prospect of significantly varying rates in England, Wales and Scotland. 

When will the rate be set?

The initial review of the rate must be started within the 90 day period following the commencement of the Bill. Thereafter, each subsequent review must be commenced within 3 years of the last review, or earlier within the 3 year period as is required by the Scottish Ministers (referred to within the Bill as an "extra review").

Any extra review required by the Scottish Ministers does not 'restart' the 3 year period from the previous rate review. The 3 year period stated within the Bill is consistent with the initial position of the Civil Liability Bill.

However, it has recently been proposed by the Lord Chancellor that the period prescribed within the Civil Liability Bill be increased from 3 to 5 years. Large loss cases typically take up to five years to resolve, there is likely to be the possibility that either party might seek to use a pending review to manipulate a settlement negotiation. A longer review period might prevent such 'gaming' of the system, and this may be discussed when the Bill is placed before the appropriate committee.

Periodical Payments

Prior to the Bill, Scottish courts could only make a periodical payment order (PPO) when the parties both consented, again in contrast to England, Wales and Northern Ireland, where the Courts Act 2003 allows the court to impose such a PPO.

The Bill introduces a duty for the courts to consider whether a PPO is appropriate when awarding damages, and also provides the power to the court to make a PPO without the consent of the parties – albeit this is limited to future losses in personal injury cases.

Any other PPOs which a court may consider appropriate (i.e for past losses) can be made, but only with the agreement of the parties.

Next steps

The ABI has indicated that the Scottish Parliament’s Economy, Jobs and Fair Work Committee will be assigned as the Committee responsible for scrutiny of the Bill. Once they have been assigned, it is understood that it will issue a call for evidence on the Bill before the end of June, with all responses expected by August. The Committee will start taking oral evidence on the Bill in September.

The explanatory notes to the Bill indicate that the Scottish Government expects the Bill to come into effect in 2019.

We will continue to provide updates on the progression of the Bill.