Periodical Payments: Financial Aspects

Transcription

1 Periodical Payments: Financial Aspects Ralph Chatfield T:

2 Financial aspects Financial advice Indexation Position of MIB and others

3 Financial advice To Claimants: Explain the new regime and the (possible) choice between a lump sum and periodical payments Explain the difference between an annuity and self funded payments Explain the security issues for periodical payments Consider whether the Claimant wants periodic payments or a lump sum, and their reasons Assess their attitude to financial risk

4 Comparison of periodic payments and lump sums Periodic payments Advantages Guaranteed payment for period of 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 of Claimant Disadvantages Taxable Monies can run out Investment and transaction costs Investment at one point in the cycle

5 Financial advice But: The Claimant s needs are paramount, not the Claimant s wishes

6 Financial advice What happens where there s contributory negligence? What happens where there s litigation risk? Stream of periodic payments will not match the Claimant s needs Any residual sum (generals etc) will be eventually exhausted Potential to create a poverty trap as Claimant will continue to receive the periodic payments which will be insufficient

7 Financial advice Means tested benefits Since October 2002 treatment of periodical payments and lump sums held in trust were brought into line: Income support: periodical payments and funds derived from a lump sum held in trust, are disregarded entirely when used for items other than everyday living expenses, and 20 a week used for such expenses is also disregarded. Therefore damages for care are protected, and damages for lost earnings are taken into account Local authority provision of residential care: regulations generally follow those for Income Support

8 DCA Guidance Periodical payments mean a change from top-down to a bottom-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 a substantial lump sum

9 DCA Guidance This should remove the need for Claimant s to obtain financial advice on the investment and management of the award Moving from a top-down to a bottom-up approach means that the Claimant should no longer need financial advice on how to structure the payments or on the best priced annuity available to meet his or her needs Department for Constitutional Affairs Guidance on Periodical Payments

10 Financial advice Practice Direction 41B: In deciding whether periodical payments are likely to be suitable, the factors that the Court shall have regard to shall include: The scale of the annual payments taking into account any deduction for contributory negligence The form of the award preferred by the Claimant, including the reasons for the Claimant s preference and the nature of any financial advice received by the Claimant when considering the form of the award The form of the award preferred by the defendant, including the reasons for the defendant s preference

11 Financial advice Advising defendants Request their preference between a lump sum or periodical payments and any reasons to support their views Defence insurers whether can or wish to self fund, or need to purchase an annuity (self insure if available, or external life office)

12 Financial 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

13 Financial advice At an early stage communication between the parties Whether agreement can be reached that the case is suitable for periodical payments or a lump sum If periodical payment, whether to be self funded or a purchased annuity If an annuity whether the product is appropriate, and tried and tested

14 Financial advice Are you allowed to give financial advice under FSMA 2000? Law Society is a professional body recognised under the Exemption Regime, and therefore its members are covered The advice is incidental to their main practice (specific example noted in the FSA Guidance for structured settlements) If a regulated FSA financial advisor is appointed, the Claimant should communicate directly with him/her. Ensure their appointment is at arm s length so you are seen to be acting with integrity and complete independence Avoid receiving any commissions etc.

15 Indexing periodic payments Most structured settlements have been RPI linked Annuities can only be RPI linked due to the FSA regulations requiring close matching i.e. underlying assets producing the same values. The only index linked products are ILGS which are based on the RPI The Courts Act allows the court to adopt a different index in a particular case if it has particular exceptional circumstances

16 Indexing periodic payments The evidence for different indeces: Earnings inflation has consistently outstripped prices in the past Care inflation an NHS inflation measure (PCI), which shows increases greater than the RPI, is being used as analogous to care inflation But: Decision in Sheppard v- Stibbe

17 Indexing 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)

18 Security of payment Continuity of payment can automatically be considered to be reasonably secure where: It is protected by a Ministerial guarantee under s 6 of the 1996 Act 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 service body Department for Constitutional Affairs Guidance on Periodical Payments, paraphrasing s 2(4) of the Damages Act

19 Security of payment MIB MIB not automatically considered reasonably secure (see the 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 on the insurance industry: Thacker v Steppels & MIB Daniels v Edge & MIB Therefore MIB can, and is willing to, self fund

20 Security of payment MPS, MDU etc Not automatically considered reasonably secure (see the three headings in s2(4)) Generally willing to offer periodic payments to avoid being seen as second class defendants Unable to demonstrate reasonably secure in the long term. Would consider short term self funded periodic payments if the court were persuaded that reasonably secure for that period. Would require a test case.

21 Security of payment Lloyd s Contributing to the FSCS since 1 January 2004 therefore automatically considered reasonably secure

22 Security of payment Foundation Trust hospitals Query whether covered by the legislation NHS bodies covered through the NHS (Residual Liabilities) Act This does not apply to Foundation Trusts Foundation Trusts covered by Health and Social Care (Community Health and Standards) Act 2003, which gives the Secretary of State the power to pick up liabilities, but not the obligation