Economy, Energy and Fair Work Committee

Meeting date: Tuesday, November 6, 2018

Official Report 802KB pdf

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Damages (Investment Returns and Periodical Payments) (Scotland) Bill: Stage 1

Agenda item 3 is an evidence-taking session on the Damages (Investment Returns and Periodical Payments) (Scotland) Bill. I welcome the Minister for Community Safety, Ash Denham, to the meeting.

Good morning, convener and committee. Having sat on the Economy, Jobs and Fair Work committee, I just want to say that it is nice to be here at the Economy, Energy and Fair Work Committee.

Good—we will see how matters unfold. [Laughter.] I am sorry, minister—I meant nothing untoward by that.

As you will be giving a statement, I will introduce the other witnesses and then invite you to begin. We have from the Scottish Government Jill Clark, civil law and legal system division; Scott Matheson, legal directorate; Alex Gordon, parliamentary counsel office; and Frances McQueen, also from the civil law and legal system division.

May I say, minister, how good it is to have you back at the committee. I invite you to make your opening statement.

Thank you, convener, and I thank the committee for inviting me to give evidence on the Damages (Investment Returns and Periodical Payments) (Scotland) Bill. As you know, part 1 of the bill provides a changed methodology for setting the personal injury discount rate and allows courts to impose, and in certain circumstances vary, periodical payment orders. It follows quite a lengthy period of consultation on the issue, given the range of criticisms of the current methodology, and the bill itself is intended to address some common concerns that emerged from that consultation with regard to the fairness, clarity, certainty, regularity and credibility of the method and process for setting the rate.

Although the types of personal injury cases that will be impacted by the legislation are not high in volume, they are at the serious end of the injury scale. The personal injury discount rate is therefore of significant importance to both pursuer and defender interests in personal injury damages awards for future pecuniary losses. As the committee has heard in its evidence sessions, both interests have very different perspectives on how best to achieve, and what will deliver, 100 per cent compensation for those who have suffered significant life-changing injuries in order to put them back in the position in which, but for their injury, they would have been.

For a range of reasons, the process is not an exact science; it is, as the committee will have heard in evidence, inevitably imperfect. Without the benefit of foresight, it can never be anything other than an approach that provides the best possible assessment for the broadest range of cases. The policy intention in the bill in respect of the PIDR is to strike a balance between making provision for regular reviews and setting out a transparent and credible process that will ensure much needed certainty and clarity in the law.

Part 2 of the bill relates to periodical payments, principally under periodical payment orders, which are an alternative means of paying damages for future losses other than a lump sum. In some cases, a pursuer might have a straight choice between taking a lump sum or a PPO. However, it should be stressed that that is not always the case, and the two options should not be seen in that light, as might have been suggested in earlier evidence sessions.

I look forward to the committee’s questions on the principles of the bill.

Thank you for that opening statement, minister. I will start with one or two questions.

You mentioned the uncertainties in this area. Those uncertainties are recognised on all sides and by the committee, and they may affect the notional portfolio and the methodology that is used to create it. One issue that has been raised is the question of how the “notional portfolio” can represent the needs of the “hypothetical investor”—I suppose that the bill’s use of those terms indicates some uncertainty in the first place. Is the methodology used in setting out the notional portfolio clear enough?

As you will have seen, the bill sets out a portfolio with asset classes and percentage holdings that are designed to meet the needs and characteristics of the hypothetical investor. Because they are laid out in the legislation, I will not go over them now.

The hypothetical investor will have a series of objectives. They will be properly advised, and our objective will be to secure the investment of the award to cover their damages, losses and expenses. They will make withdrawals from the fund over the period to cover their losses and expenses, and the withdrawals will, over the period in question, exhaust that fund.

The portfolio is designed to meet the very specific needs of the hypothetical investor, and it was arrived at on the basis of professional advice and expertise. The Government Actuary’s Department carried out detailed analysis of a number of funds that were categorised as low risk by a firm called Morningstar, which is a third-party investment research firm that is widely recognised across the industry. The notional portfolio was built with reference to those funds. The Scottish Government believes that the portfolio would, therefore, meet the needs of an individual who is in the circumstances that we are describing.

The committee should also note that a small majority of respondents to the 2017 consultation were of the view that the idea of a mixed portfolio of assets was the right way to go, as it balances flexibility with the best way of managing the risk. In addition, some respondents suggested that the approach most closely matches the actual behaviour of pursuers when they are investing. I hope that that answers your question.

Do you have a view on how often you will need to use the regulation-making power to change the contents of the notional portfolio? Who will monitor market conditions to decide when and if that needs to be done?

The intention is to review the portfolio—and the adjustments, which we have not mentioned yet—ahead of every regular review. That would give us the opportunity to change the adjustments if we thought that that was necessary as they were not meeting the needs of the hypothetical investor at that time. In addition, the bill gives Scottish ministers the power to call for an out-of-cycle review. That offers a failsafe, so the portfolio should always match the economic conditions.

On your question about monitoring market conditions, we envisage that we will work in partnership with the Government actuary on monitoring conditions. We will have good and open communication to keep the portfolio constantly up to date.

There have been some suggestions about how the discount rate is set up. The current assumption is that the discount rate should be calculated on a risk-free basis, but under the bill, we will move to the assumption that it should be based on a cautious investment strategy, which might fit in with what you were saying about safety and flexibility in the notional portfolio. Do you have a view on whether that change transfers investment risk to the pursuers? If so, is that unfair, or does it strike the correct balance? If the latter, why do you think it does so?

I heard the question raised in some of the committee’s previous evidence sessions. Our belief is that the portfolio in the bill is very cautious, for the reason that you have highlighted. The committee will also have heard evidence from the other side—the defender interest—that the portfolio is equity light and overly cautious. The Government is trying to tread a careful line down the middle—between the interests on both sides—to ensure that we strike the right balance.

The Scottish Government now accepts that it is appropriate to move away from the index-linked gilts approach that was taken in Wells v Wells and towards a very cautious but low-risk portfolio. We recognise that the hypothetical investor will need to take professional advice that is tailored to them, but we are making further adjustments to reduce the risk to the investor. Wells v Wells did not force pursuers to invest in a particular way, and nor does the new legislation. As will have come out in some of the earlier evidence to the committee, what pursuers actually do is irrelevant. The method is intended to provide a standardised approach that will apply across a broad range of cases.

Good morning, minister. I have a couple of questions on the adjustments that are to be made to the discount rate. We have heard some evidence that the 0.5 per cent adjustment for tax and investment advice might not be sufficient, given the market uncertainties and other unknowns in the process. Is it, in your view, a reasonable level of adjustment?

We sought views from GAD on that very topic—the appropriate level of adjustment for tax, investment management costs and those sorts of things. Although GAD considered that a reasonable allowance would be somewhere between the 0.5 per cent that you have mentioned and 2 per cent, it took the view that the lower end of that range would be more appropriate. It gave a number of reasons for that, one of which was that it thought that investors would typically shop around to get the best possible rate. In its report, GAD suggested that the Scottish Government should seek further advice on the level of the adjustment, and work is being undertaken on that. I do not know whether any of my officials would like to say a little more about that.

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GAD’s other reason for opting for the lower end of the range was the likelihood of the portfolio being full of passive funds that would not need a lot of management, and the current shape of the market means that there is no pressure with regard to higher tax charges. The fact that there is another adjustment in the bill also compensates on the way down. GAD thought that the adjustment was reasonable for a range of reasons, but we are looking at the matter further.

You mentioned the further deduction—the further margin of 0.5 per cent to reduce the risk of underperformance. We have heard evidence to suggest, and the Scottish Government has said, that there might very well be overcompensation as a result of the further adjustment being introduced. Does the minister accept that that is a potential departure from the 100 per cent compensation principle?

That is a good question. The answer is no, we do not think that it is a departure. By now, it will be clear to the committee that, as I have said, this area is not an exact science. For a range of reasons, there will always be to some degree the probability of undercompensation or overcompensation, and that is why the adjustments are there. The particular adjustment that we are discussing recognises that an investment, however cautious, will always carry some sort of risk. The methodology that we use acts as a proxy and is therefore unable to take account of individuals’ needs, because factors can vary. That is the reason for that.

The further adjustment is being made to improve the chances of a pursuer having exactly the right amount of funds to cover them. When we talk about the idea of undercompensation, and the likelihood or probability of it happening, it is worth stressing that there are no absolutes. No matter the award basis, there is risk involved. However, there has been some analysis, which I will share with the committee, on the distribution of returns generated by the investment portfolio in the bill, and it shows that, if the return were not to be adjusted in the way that we are describing, it would result in a 50 per cent chance of the pursuer being undercompensated and a 50 per cent chance of overcompensation. The question, therefore, is whether a 50 per cent chance of undercompensation would be acceptable. I would say not, so the further adjustment is needed to reduce the risk of undercompensation.

What is the evidence base to support the 0.5 per cent figure?

It came from the analysis that GAD carried out for us, in which it applied different margins of justice to drive down, at the lower percentiles, the risk of overcompensation or undercompensation in order to get to a position that was more acceptable than 50 per cent.

Did GAD again give you a range of figures?

Yes. We sent GAD’s report to the committee, and it is also on our website, where the information is laid out in tabular form.

Thank you.

Can you explain why you chose 30 years as the period over which a hypothetical investor would invest?

The investor damage profile is 30 years. There is no authority on which to base that figure; it was chosen merely as a useful duration that was neither too short nor too long. We should remember that it is meant to cover a broad range of cases. As there will be cases at either end of the scale, a 30-year period was taken as correct for the damage profile.

To what extent do you believe that it will impact negatively on, for example, pursuers with a very short life expectancy?

It is possibly true that shorter awards might lead to a greater chance of undercompensation. Some work that has been completed on that area indicates that more than one rate would not be necessary at this time. However, the bill provides for the opportunity to set dual or multiple rates to address any issues. Perhaps my officials can add to that.

We asked GAD to model over a 30-year period on the basis that it was an average, but it also looked at periods of 15 years and 50 years, and its report contains a graph showing the difference between the shorter and longer durations. Ahead of each review, GAD will do the same work and offer advice. If the differential gets too big, it might point to a more sensible option of having more than one rate—one for a shorter duration and one for longer—but the evidence does not currently point in that direction. That said, the bill leaves it open for more than one rate to be applied in the future, should the analysis indicate that it would be better, and fairer, to do so.

Section 1 makes it clear that

“the court may take a different rate of return into account if a party to the action shows that the different rate is more appropriate in the circumstances of the case.”

I presume that it was always intended that that provision would never bind the hands of the court.

Absolutely. Under existing law, the court can look at the particular circumstances of a case and decide that the rate set is not appropriate. We are retaining the same provision in the bill. The provision is used very rarely, but it is nonetheless there.

In what circumstances is it used?

It might be used if the court thought that the circumstances of a particular case were so far outwith the broad application of the rate that it would be more appropriate for another rate to be applied, but such a case would have to be at the extreme end.

If ministers were minded to set more than one rate, what circumstances might lead to that happening? How would that apply in practice?

We have not yet come to that conclusion. As Jill Clark has said, we will be getting more data from GAD, and if it is clear from further evidence that shorter awards might lead to undercompensation, and if we thought that there was a need for different rates to be set, we would need to look at the matter in detail and see how that would work. It is something that we are looking at.

One factor might be different durations of life expectancy. Are there other circumstances that might lead ministers to conclude that different rates should be set?

In general, what is taken into account is the duration of the award rather than a person’s life expectancy. Jurisdictions that have more than one rate will have different rates for 10 years and 15 years, and a different rate for longer periods. A jurisdiction will choose a duration, and the time periods will differ between jurisdictions—there seems to be no consistency in that respect. One would settle on something that, where a differential has been created, would try to close that gap by applying two different rates. Indeed, one could apply three rates—there is nothing to stop multiple rates being applied. Any such change would need to be made because actuarial advice had suggested that, on the basis of analysis and evidence, it was the best way to go.

So the calculation is basically about life expectancy and the duration of the award. Are there no other circumstances, such as the capacity of the injured person or their age at the time of the injury, that might lead to different rates being set?

In general, that all gets tied up in the duration of the award, which lasts until the point at which a person either improves or gets better or until the termination of their life.

Thank you.

I want to follow up on one aspect of that question: the 30-year period. The Association of British Insurers suggested in its written submission that 46 years would be more appropriate. The ABI said:

“46 years is appropriate because it is the mean duration of future damages in those cases where the discount rate is a significant factor. The GAD report demonstrates clearly that if a more appropriate period of 46 years were to be applied, then the probability of under-compensation decreases. As such, an explanation as to the use of the 30 year period is required.”

Can you answer the point about the probability of undercompensation being higher if one uses the 30-year period? In addition, can you tell us whether a specific methodology was considered to be preferable to others in arriving at the decision to use a 30-year period?

I will ask my officials to give more detail on that.

My answer is almost the same as my previous one. Higher or lower, 30 years is a kind of average, if you like, or an appropriate level. GAD applied the same analysis to each duration—we understand that it put each period through its economic scenario generator, and the figures popped out at the end. There was no different methodology applied; GAD simply applied different durations of award.

It is usually the case that the longer the award period, the more time someone has to recover from any dips in the market and get back to a better place. As I said, the figures that GAD provided indicate that more than one rate is not currently necessary. If that has not answered your question, we can provide something more.

Perhaps you can provide a further explanation to the committee in writing—that might be helpful. You said that 30 years is an average. I suppose the question is, an average of what? Secondly, why were different factors chosen for that? A further explanation in writing would be appreciated.

We would be happy to write to the committee with further information.

Thank you.

To build on the questioning so far, I want to ask about political accountability and who makes all the decisions. From what I understand, the Government and you, minister, will be more involved in the notional investment portfolio, but the actual discount rate is much more under the control of the Government actuary and so on, which is a slightly different system from that which applies in England. How do we get the balance right? Could we go one way or the other?

Part of me wonders whether, in this world of automation, we could simply automate the whole process. The portfolio could be tied to the market and discount rates could all be set by formulas, and there would be no political involvement, which sounds quite good. On the other hand, some people would like to put the minister up in the chamber so that we can ask her questions and shout at her about these things. How do we get a balance?

That is a good and fair question. A bit of comparative work has been done on how other countries do things, and it seems that there is huge variety in the way that different jurisdictions approach these matters. In some jurisdictions, the responsible party is a legislator. In other jurisdictions, it is the judiciary. In some jurisdictions, there is a hybrid system that involves both parties, to differing extents. Obviously, the decision is one in which policy choices come into effect. We have taken a policy decision to place the duty to review the discount rate on the Government actuary because we think that that is consistent with our overall policy of reforming the law so that method and process are clear, certain, fair and transparent.

It is important to mention that our decision is consistent with responses to the 2017 consultation, which showed more support for options that did not involve ministers. The Scottish Government’s view is that the determination of the rate is purely an actuarial exercise; there is no need to exercise political judgment. The decision has been taken to give that duty to a suitably qualified and credible professional, and the Government actuary has been selected because of its expertise and standing in that area. GAD will publish its reasoning along with the rate, which will allow complete transparency in the process. We think that that is the right approach in this case. Would Jill Clark like to add anything?

Probably not.

I am broadly persuaded by your argument on the rate, but why would that not also be the case for the notional portfolio? It has been suggested that, although we have a nice Government at the moment, we might not have such a nice Government in future, and that Government might manipulate the portfolio.

That is a fair point. That is why it is really good to remove the rate from the political arena—which, as I am sure that the committee is aware, is not the case in England and Wales—and from people who would seek to influence it or ministers who might be under pressure.

The methodology for the portfolio needs to be developed over a longer time and requires more analysis. The portfolio is able to be reviewed by Government ministers in order to ensure that it matches up with economic conditions. It will also be subject to scrutiny by Parliament, which adds an extra level of credibility and transparency to the process.

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A constant in the bill is the description of the hypothetical investor. The notional portfolio can be changed only in line with the hypothetical investor. Somebody could not come along and suddenly make the portfolio very risky, because that would not meet the needs of the hypothetical investor. That is the grounding part of the bill. The powers to change the portfolio and the adjustments are simply intended as a way to keep them up to date and relevant as investment markets change. The constant is the description of the hypothetical investor, which will have been agreed by the Parliament.

I see that Alex Gordon wants to come in on that.

I have a technical point to aid navigation of the bill. The Government and the minister have put all the figures before the committee, so if the bill is ultimately passed, Parliament will have endorsed those figures at the outset. Even if ministers were to come forward with regulations to change anything—the period of 30 years, the figures in the notional portfolio or the standard adjustments—those regulations would all be subject to the affirmative procedure, so any such changes would need parliamentary endorsement.

That is helpful, thank you. Minister, you said that we could—well, we obviously will—end up with different systems in Scotland and England. Is that a problem? Does it cause any concern, given that some insurers, for example, operate throughout the United Kingdom if not beyond?

I do not have any practical concerns about that. We consulted jointly with the Ministry of Justice on setting the PIDR. The Lord Chancellor is responsible for setting the terms in England and the Scottish ministers are responsible for doing so in Scotland, so it is appropriate that we took the work forward separately. That might or might not result in different rates being set north and south of the border, and at this time, we do not know how insurers would react to that in setting their premiums. However, it is important to note that the number of catastrophic, high-value cases will be really quite low, and the amount of business will be quite small in relation to the insurance business overall.

Insurers are only one of the categories of defender in such cases—the national health service is another. A lot of us are probably sympathetic to the idea that we should be a bit more generous to the injured party, but in reality that would have an impact on the NHS. Presumably, if the NHS was paying out slightly more than elsewhere, we would have to find that money from its budget. Again, I wonder whether we are getting the balance right. Is there a problem for the NHS budget in the future?

That is a good question. The proposed higher PIDR rate would, in comparison with the current methodology that relates to Government gilts, if the same exercise were carried out simultaneously, produce awards that were on average closer to the principle of 100 per cent compensation. The application of that rate should result in less overcompensation than under the current system. The cost to defenders such as the NHS—which, as you mentioned, is a major player—should be less in terms of the awards that they are required to make. The committee will have heard from the NHS and other stakeholders that they support the continued facility to settle future losses by way of PPOs, and they welcome the changes in the bill accordingly.

Can you clarify something? You said that the cost to the NHS would be less. It might be less than the NHS is currently paying, but it would perhaps be more than the equivalent cost in England.

At this point, we do not know. We simply do not know what the discount rate will be in England and Wales, and we will not know until the end of the review in that regard, because that is when the rate will be set. It is difficult to say.

That is fair enough.

We will keep the matter under review.

I suppose the question of whether we have a “nice Government” at the minute depends on whom you ask and which Government the deputy convener was referring to, but we will put that to one side.

I would like the minister to clarify one point. You quite rightly said that different approaches could be taken to this matter. Is it the Government’s intention to effectively institute independent decision making in, and remove political influence from, the specific process for the discount rate, by having the UK Government actuary deal with it?

Absolutely—the process will be fully transparent and independent of ministers and political interference.

Andy Wightman has a brief follow-up, and we will then move to questions from Gordon MacDonald.

To follow up on John Mason’s line of questioning, I would like to have one point clarified. I might have missed something, but it seems that the Government actuary will be responsible for setting the rate. Ultimately, that will be down to ministers, but the Government actuary will be the professional adviser in that regard. However, there are no provisions in the bill that relate to what advice ministers will take in making any changes to the notional portfolio, which is a role that is given exclusively to ministers. Do you think that there might be a role for the Government actuary in that regard as well, or am I reading the bill wrongly?

No, there will be—ministers and the Government will take advice from GAD on that.

As far as I can see, there are no statutory provisions for taking advice—or am I wrong?

There is no statutory provision to that effect, but there is no statutory provision in many areas in which the Government takes appropriate professional advice in a range of circumstances as a matter of course.

I am just wondering, because, although the bill makes it clear that the Government actuary—unless the Government appoints somebody else—is responsible for setting the rate, it does not make clear what role any party such as the Government actuary would play in potential changes to the portfolio.

The actual determination of the rate is a function that is conferred on the Government actuary. There is provision in the bill to allow, by regulation, the Scottish ministers to change that in due course if it is necessary for somebody else to exercise that function.

At that stage, the Government actuary’s role is one of decision making within a very narrow range of parameters that are set out in the legislation. GAD is not acting as an adviser to ministers who are determining the rate—it will be determining the rate and producing a report. It will be the rate as set out in that report that the courts will take into account, subject to the discretion that was referred to earlier.

So the statutory provisions are there because the Government actuary is a decision maker and that has to be made clear, but there is no statutory role for the Government actuary or anybody else in advising ministers on the make-up of the portfolio. My question is, therefore, should there be such a role or should the decision be left totally to the discretion of ministers?

With parliamentary oversight.

Of course, all those elements will be subject to regulation-making powers in Parliament, but when an affirmative procedure comes forward, there is huge depth behind it and one cannot expect Parliament to drill down on every issue. In order to assist Parliament in that job, I suggest that there might be merit in making statutory provisions for advice, in order that such advice can be interrogated in exactly the same way as the GAD report can currently be interrogated by interested parties.

I come back to the point that Jill Clark made earlier. Under the legislation, the portfolio has to take into account the interests of the hypothetical investor. Any changes to the make-up of the portfolio will bear that in mind, and it will be further scrutinised by the Parliament. I am fairly comfortable with the process as it is.

Jamie Halcro Johnston has a brief follow-up question, before I bring in Gordon MacDonald.

It is just a quick point. Paragraph 43 of the financial memorandum to the bill states:

“a 0.25% differential could add around £2m to £5m”

to the cost of claims against public bodies.

South Lanarkshire Council, in its submission to the Finance and Constitution Committee, suggested that it would expect the Scottish Government to cover any fluctuations in costs as a result of claims against public bodies or increases in their premiums. Has the Government looked at that? Is it ready to do what the council suggests?

We are keeping the matter under review, but I will ask my officials to give you a little more detail.

The answer is the same as the one that the minister gave earlier. Relatively speaking, we expect the discount rate to increase under the new method, so costs to defenders should therefore decrease. Nonetheless, we will keep the matter under review.

In previous evidence sessions, it has been suggested that five years, or even seven years, would be a more suitable time period for the discount rate review. What is the justification for having a review period of three years in the bill?

That is a good question. In general, the bill is meant to ensure that we avoid the previous situation, in which there were very long periods between reviews. It was considered that the three-year period would be a suitable compromise. The Government is certainly open to considering alternative periods, including a five-year period if that would be more acceptable. I would be interested to read the committee’s views on the matter in its stage 1 report if it is considering such a proposal.

We also heard concerns that, as it can take several years to settle some personal injury cases, either party involved in the case could try to delay or speed up settlement to take advantage of a rate change if they know in advance what it will be. Can any safeguards be put in place in the bill to minimise that risk?

For the very reason that you have outlined, the three-year review period would seem to strike the right balance. If a routine review is carried out every three years, such gaming of the system might not occur.

In addition, we should bear in mind that, even though a regular review will be carried out every three years, it will not necessarily lead to a change in the rate every time. The bill also gives ministers the opportunity to carry out an interim review. It would be possible to do that at any point, if necessary—for example, if economic circumstances changed drastically, and suddenly the rate was not appropriate—to keep the rate up to date. Again, I would be interested to hear the committee’s views on that. We thought that a three-year period would be appropriate, but I would be interested to hear other views.

Thank you.

In previous evidence sessions, there has been some discussion about periodical payment orders and their impact. Are the provisions in the bill sufficient to increase the use of PPOs in Scotland? Does the Government have any other plans to encourage their use?

The number of cases in which a PPO could be used is quite small to begin with, so we are not anticipating a large increase in take-up. We simply hope that providing courts with the option to encourage people to use PPOs where that is appropriate might lead to a slight increase in numbers. In addition, there might be some influence in cases that do not go to court but are settled by agreement—even though people would not be forced by a court order to use a PPO, they might consider using one anyway.

We know that PPOs are not suitable for all pursuers or in every case. For a variety of factors, some pursuers might prefer to have a clean break, so they will not want to enter into such an arrangement. In addition, not all defenders will be sufficiently financially secure to use a PPO. Nevertheless, we hope that greater use will be made of PPOs.

The evidence seems to indicate that virtually 100 per cent of PPOs are used by the NHS and that virtually no one else uses them. Do you see that changing?

Jill Clark might want to respond to that.

There might be a marginal change as people feel more encouraged to use them but, as the minister said, the numbers are not very high in the first place. The NHS is the predominant user of PPOs.

The numbers are not high, but the value is significantly higher.

Yes.

In last week’s evidence session, the committee noted that the bill’s provisions on reasonable security do not appear to cover the Motor Insurers’ Bureau. Is that omission deliberate? If so, what was the thinking behind it?

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The bill’s provisions allow the Scottish ministers to add additional bodies to the list. That would be the process for including the Motor Insurers’ Bureau. I know that the issue has been raised by a number of consultees.

In addition, there was a bit of concern about Brexit, given the timing of the bill and the fact that the UK’s leaving date will coincide with the later stages of its parliamentary passage. It was decided that the inclusion of a power to enable the Scottish ministers to add or remove bodies to the list—in the case that you mentioned, the MIB—was the most appropriate and sensible option.

To be clear, are you saying that the Government will consider adding the MIB to the list, or that it will do it?

At this point, we are considering it.

We will wait and see. The courts have found the MIB to be a secure provider, but article 4 of the second European directive on motor insurance contributed to the courts’ thinking in that respect, and we want to see what will replace the directive in a Brexit world. Once we are confident about that, the MIB could be added to the list. There is a lack of clarity at the moment—if the directive were no longer in place, what would replace it? Obviously, the UK Government would put something in place.

So we must wait for the UK Government to give some sort of indication on that.

Yes.

At present, therefore, you could not add the MIB to the list, given where we are currently situated.

I think so. One of the factors that has contributed to the courts’ consideration of the MIB as reasonably secure is about to change, so we think that it would be a bit premature to add the body to the list at the moment.

The bill’s provisions on reasonable security set up an assumption that allows the court to proceed on the basis that the defender or payer in question will have sufficient financial backing for their PPO payments during the course of an award. However, setting up an assumption does not exclude the possibility that a defender who is not on the list in statute could persuade the court that they have sufficient financial backing. The fact that a defender is not currently included under the provisions in the bill would not prevent them from making a case to the court that they should be seen as being reasonably secure.

That is what the MIB currently does—it has to convince the court case by case—but normally the court finds that it is secure.

Thank you for that clarification.

The committee has heard evidence to suggest that the risk of satellite litigation would be reduced if the wording in the bill on seeking a variation of a PPO mirrored existing legislation. Is the Government considering that?

We have looked at that matter, and we do not think that the model in the Administration of Justice Act 1982 is an appropriate fit. I will let the officials give you a bit more clarity on that.

Again, I am speaking on a technical basis—I hope that I am answering the right question. As a drafting technician, I find it useful to look at other legislation by way of example, but I am wary of picking up something as a precedent that might not be the best fit in the context that we are currently dealing with. I am always open-minded as to how one might go about things, and there is always more than one way to go about anything.

In Government, we choose our approaches very carefully in each particular context. The gateway to variation, and how variation applies once one is through the gateway, rests on two conditions. The court must be satisfied, first, that there is a chance of change in the pursuer’s condition at some point in the future and, secondly, should that change occur, that there would be overcompensation or undercompensation.

At present, we do not weigh the amount of change that is required in the condition or what the chance of change is. That just takes us to the real root of the issue, which is whether there is likely to be significant overcompensation or undercompensation. Perhaps it is not necessary to measure the amount of risk of change or how much change there would be, because it is unlikely that there would be significant overcompensation or undercompensation if there was no change, or no meaningful change, in someone’s condition.

Although we could, on a different day, try to calibrate that differently, I think—or rather, I hope, because I helped to put the provisions on the page—that we can go straight to the root of the problem: namely, the issue of whether there is significant overcompensation or undercompensation. I do not know that we need to clutter the legislation with some other qualifier for the first part of the twofold test, given that the main element of that test is the second part.

Staying on the question of pursuers returning to court to request a variation of a PPO, concerns have been raised about the costs involved. Perhaps the minister can consider whether she could commit to ensuring that those costs fall on defenders, which would be a fairer approach.

That is an interesting point, which raises some questions about the provision for qualified one-way costs shifting, or QOCS, in the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018, which was recently endorsed by the Justice Committee and the Parliament as a whole. We would need to look at the interaction between the 2018 act and the bill before us, and consider the matter further. We would be happy to write to the committee with further information on that.

That would be interesting. Although we have no feel for how much it would cost for a pursuer to come back for a variation, some witnesses have indicated that the cost could be substantial. There is a question of fairness involved.

We will be happy to give the matter a little more thought and write to the committee with our thoughts.

Good morning, minister. As the new boy on the committee, I will ask a slightly less technical question, although I am very impressed by my colleagues’ rigour in examining the issue in front of us.

You said in your opening remarks that the bill’s intention was to put people back, as far as possible, in the position that they would have been in before they suffered serious injury. Are you confident that it will deliver on that objective? Are you satisfied that there will be sufficient scrutiny opportunities to enable Parliament and the committees to examine the matter in future?

We are. The bill has been requested, and its principles have been subject to consultation not once but three times, so it is clear that there is quite a desire for a change in the law. There was not exactly a consensus on some of the policy choices, but the Government has been careful to choose a course of action that is intended to strike the appropriate balance between the interests of the pursuer and those of the defender, and to make the method and the process for setting the rate as clear and transparent as possible, with the ability—as you rightly said—for scrutiny by the Parliament. I am very comfortable that the bill does those things.

Are there any further questions from committee members?

Jill Clark said earlier that she expects the discount rate to increase as a result of the bill. Can she explain why?

I said that any increase would be relative to what currently exists. Investment markets have changed since 2017 when the current rate was set. The portfolio is a higher risk than the index-linked Government securities investment, so it should follow that the discount rate will be slightly higher, if there is a level playing field and analysis of both options is carried out at the same time.

So the Government believes that there is currently overcompensation.

Yes—under ILGS, the probability of overcompensation is significantly high.

Thank you. I just wanted to get that clarification on the record.

I have a quick question on something that you might be able to clarify, minister. The bill that became the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 initially capped payments for no-win, no-fee arrangements at 2.5 per cent, but that was overturned by a Scottish Government amendment that allowed the current situation to continue for one-off payments. However, that does not apply to PPO settlements. How does that impact on decisions by pursuing solicitors? Might it make them discourage their clients from entering into PPO settlements?

I will ask my officials to give you some more detail on that.

It is difficult for me to speak for the entire legal profession—as an adviser to the Scottish Government, I do not feel that I can really do so.

I believe that some firms, at least, have put in place practices to ensure that the intended recipient of the damages has taken independent actuarial advice; that the decision on whether to take a periodical payment settlement rather than a lump-sum award is taken on the basis of such advice; and that steps can be taken to ensure that the advice is given independently to the recipient of the damages rather than being filtered through the solicitors concerned so that its independent nature is not skewed by the interests of those solicitors. I give that as an example rather than as a statement of universal practice.

It would indeed be a brave man or woman who claimed to speak for the entire Scottish legal profession.

I thank the minister for coming in.

10:41 Meeting suspended.  

10:47 On resuming—