periodical payments: financial aspects - guildhall · pdf fileperiodical payments financial...

Periodical Payments:Financial Aspects

Ralph Chatfield T: 0117 946 2006

[email protected]

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


But:

The Claimant’s needs are paramount, not the Claimant’swishes


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


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”


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:


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)


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


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


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


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


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


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


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.


Lloyd’s

Contributing to the FSCS since 1 January 2004 thereforeautomatically considered “reasonably secure”


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

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