Periodical Payments: Financial Aspects - Guildhall · PDF filePeriodical payments Financial...
Transcript of Periodical Payments: Financial Aspects - Guildhall · PDF filePeriodical payments Financial...
Periodical paymentsFinancial aspects
Financial advice
Indexation
Position of MIB and others
Periodical paymentsFinancial advice
To Claimants:
Explain the new regime and the (possible) choice between alump sum and periodical payments
Explain the difference between an annuity and self fundedpayments
Explain the security issues for periodical payments
Consider whether the Claimant wants periodic payments or alump sum, and their reasons
Assess their attitude to financial risk
Periodical paymentsComparison of periodic payments and lump sums
Periodic payments
Advantages
“Guaranteed” payment for periodof loss
Tax free
Disadvantages
Annuities are RPI linked only
Fixed, no flexibility (except for“Variation”)
Linkage maintained with defendant
No residual sum
Lump sums
Advantages
Ultimate flexibility
Investment decision in hands ofClaimant
Disadvantages
Taxable
Monies can run out
Investment and transaction costs
Investment at one point in thecycle
Periodical paymentsFinancial advice
But:
The Claimant’s needs are paramount, not the Claimant’swishes
Periodical paymentsFinancial advice
What happens where there’s contributory negligence?
What happens where there’s litigation risk?
Stream of periodic payments will not match the Claimant’sneeds
Any residual sum (generals etc) will be eventually exhausted
Potential to create a poverty trap as Claimant will continue toreceive the periodic payments which will be insufficient
Periodical paymentsFinancial advice
Means tested benefits
Since October 2002 – treatment of periodical payments andlump sums held in trust were brought into line:
– Income support: periodical payments and funds derived from alump sum held in trust, are disregarded entirely when used foritems other than everyday living expenses, and £20 a weekused for such expenses is also disregarded. Thereforedamages for care are protected, and damages for lost earningsare taken into account
– Local authority provision of residential care: regulationsgenerally follow those for Income Support
Periodical paymentsDCA Guidance
Periodical payments mean a change from top-down to abottom-up approach
Bottom-up only determines the annual amounts required:
– Removes arguments over life expectancy
– Removes the Claimant’s need to take financial risk in holding asubstantial lump sum
Periodical paymentsDCA Guidance
“This should remove the need for Claimant’s to obtainfinancial advice on the investment and management of theaward”
“Moving from a top-down to a bottom-up approach meansthat the Claimant should no longer need financial advice onhow to “structure” the payments or on the best pricedannuity available to meet his or her needs”
Department for Constitutional Affairs “Guidance on Periodical Payments”
Periodical paymentsFinancial advice
The scale of the annual payments taking into account anydeduction for contributory negligence
The form of the award preferred by the Claimant, including thereasons for the Claimant’s preference and the nature of anyfinancial advice received by the Claimant when consideringthe form of the award
The form of the award preferred by the defendant, including thereasons for the defendant’s preference
Practice Direction 41B:
In deciding whether periodical payments are likely to be suitable,the factors that the Court shall have regard to shall include:
Periodical paymentsFinancial advice
Advising defendants
Request their preference between a lump sum or periodicalpayments and any reasons to support their views
Defence insurers – whether can or wish to self fund, or needto purchase an annuity (self insure if available, or external lifeoffice)
Periodical paymentsFinancial advice
Defence insurers who self fund, be aware of:
Reinsurance issues:
– Pay as paid
– Chasing the retention
– Commutations
– Bad debt provisions
Reserving issues including impaired lives
Administrative burden
Periodical paymentsFinancial advice
At an early stage communication between the parties
Whether agreement can be reached that the case is suitablefor periodical payments or a lump sum
If periodical payment, whether to be self funded or apurchased annuity
If an annuity whether the product is appropriate, and triedand tested
Periodical paymentsFinancial advice
Law Society is a professional body recognised under theExemption Regime, and therefore its members are covered
The advice is incidental to their main practice (specificexample noted in the FSA Guidance for structuredsettlements)
If a regulated FSA financial advisor is appointed, the Claimantshould communicate directly with him/her. Ensure theirappointment is at arm’s length so you are seen to be actingwith integrity and complete independence
Avoid receiving any commissions etc.
Are you allowed to give “financial advice” under FSMA2000?
Periodical paymentsIndexing periodic payments
Most structured settlements have been RPI linked
Annuities can only be RPI linked due to the FSA regulationsrequiring “close matching” i.e. underlying assets producingthe same values. The only index linked products are ILGSwhich are based on the RPI
The Courts Act allows the court to adopt a different index in aparticular case if it has particular exceptional circumstances
Periodical paymentsIndexing periodic payments
The evidence for different indeces:
Earnings inflation has consistently outstripped prices in thepast
Care inflation – an NHS inflation measure (PCI), which showsincreases greater than the RPI, is being used as analogousto care inflation
But:
Decision in Sheppard –v- Stibbe
Periodical paymentsIndexing periodic payments
RPI linkage of annuities only guaranteed to 2035 currently
Due to latest dated ILGS maturing in 2035
Annuity payment increases are usually limited thereafter
Potential liability post 2035 rests with insurer
New 50 year gilt issues announced in the last budget
First 50 year gilt auction (not ILGS) on 26 May 2005
Likely that ILGS auction in late summer (22 September 2005)
Periodical paymentsSecurity of payment
It is protected by a Ministerial guarantee under s 6 of the 1996Act
It is protected by a scheme under s 213 of the FSMA 2000(i.e. FSCS)
The source of the payments is a government or health servicebody
Continuity of payment can automatically be considered tobe reasonably secure where:
Department for Constitutional Affairs “Guidance on Periodical Payments”, paraphrasing s 2(4)of the Damages Act
Periodical paymentsSecurity of payment
MIB
MIB not automatically considered “reasonably secure” (seethe three headings in s2(4))
MIB had two test cases where was held that it was“reasonably secure”, the reasoning being that it can rely onthe insurance industry:
– Thacker v Steppels & MIB
– Daniels v Edge & MIB
Therefore MIB can, and is willing to, self fund
Periodical paymentsSecurity of payment
MPS, MDU etc
Not automatically considered “reasonably secure” (see thethree headings in s2(4))
Generally willing to offer periodic payments to avoid beingseen as second class defendants
Unable to demonstrate “reasonably secure” in the long term.Would consider short term self funded periodic payments ifthe court were persuaded that “reasonably secure” for thatperiod. Would require a test case.
Periodical paymentsSecurity of payment
Lloyd’s
Contributing to the FSCS since 1 January 2004 thereforeautomatically considered “reasonably secure”
Periodical paymentsSecurity of payment
Foundation Trust hospitals
Query whether covered by the legislation
NHS bodies covered through the NHS (Residual Liabilities)Act 1996. This does not apply to Foundation Trusts
Foundation Trusts covered by Health and Social Care(Community Health and Standards) Act 2003, which givesthe Secretary of State the power to pick up liabilities, but notthe obligation