With the news dominated by Brexit over the past few months, you may have missed the coming into law of the Civil Liability Bill last December.  The Civil Liability Act 2018 (the Act) is part of the Government’s plans to increase the Small Claims Track limit, which is expected to take effect in 2020.

The Lord Chancellor has 90 days from the date of commencement to review the Discount Rate, that being on or before 19th March 2019.  The consultation period can last for a maximum of 140 days, after which the new set rate will be published via an Order. The new discount rate must be announced before 6 August 2019.  The Ministry of Justice has already called for evidence on the proposed changes to the Discount Rate, with the consultation closing at the end of January 2019.

What is the Discount Rate in personal injury claims?

When a person suffers a personal injury, compensation is designed to put them back in the position they would have been if the accident had not occurred.  If the Claimant is awarded a lump sum to cover future financial losses such as a drop-in learnings or rehabilitation costs, they are expected to invest the money and use the return to fund these needs.  The Discount Rate refers to the likely rate of return on investment.

In 2017, the Discount Rate was reduced from 2.5% to minus 0.75%, the first time it had been changed in 16 years.  The move reflected the fact that Index-Linked Government Stocks (ILGS) have dropped since 2001.  The rate also reflects the assumption that personal injury Claimants have virtually zero-tolerance for risk; however, this is not necessarily the case.  In fact, they tend to invest in diversified, low-risk portfolios which provide solid returns.

The UK has one of the lowest personal injury Discount Rates in the world.  Germany has a rate of 4%, France 1.2%, and Ireland 1%.  During parliamentary debates on the Act prior to its passing, Lord Keene stated the current rate consistently compensates for injury at more than 100% required by law.  Awards currently average 120-125% even after management costs and tax.

How does the Civil Liability Act affect the Discount Rate?

The Act determines that any rate of return on award investment should be, in the opinion of the Lord Chancellor, based on an amount reasonably expected to be achieved based upon an investment made at greater risk level than merely a low level of risk but less risk that would be taken by a prudent investor who has been properly advised but has different financial goals.

Given that there is provision for the Discount Rate to be reviewed every five years, it is clear that the economic conditions at the time may lead to an adjustment.

What is the raising of the small claims limit under the Civil Liability Act 2018?

One of the most controversial elements of the Civil Liability Act 2018 is the raising of the small claims limit for personal injury from £1,000 to £2,000, and to £5,000 for RTA-related claims.  The legislation also imposes a tariff of fixed damages – significantly reduced from current levels – for soft-tissue injuries lasting up to two years.

These changes are due to come into force in April 2020.

As expected, this move has delighted the insurance industry, who are expected to save £1.1bn from the change.  Although there is no legal requirement to do so, 26 insurers have committed to passing these savings onto consumers.  

The legal sector has been fiercely critical of the raising of the small claims limit, stating that it will result in people with injuries which significantly affect their quality of life being unable to access justice.

How will law firms be affected by the Civil Liabilities Act 2018?

Most PI- focused law firms completed a cost analysis when the Bill was journeying through Parliament and concluded that as long as a sufficient volume of claims is maintained and their systems are efficient, RTA is still a profitable sector.

For those firms looking to diversify their PI case portfolios, there is now a window of 15 months in which to build up a substantial casebook which will be covered under the existing claims limit.   Law firm finance can assist practices considering this strategy with the capital needed to purchase these types of claims and ensure that the claims are reputable, so investment is not wasted.

To find out more about how BMS Funding can assist with law firm finance options, please contact us on 0333 212 7151.

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