FTL History

When Liz Truss set the Discount Rate in negative territory in 2017, she had reason to address the fact that in an era of very low or negative interest rates, a claimant was unlikely to earn huge sums from their investment.

What she probably hadn’t intended was to cut off a vital benefit from personal injury claimants: damages to meet the cost of meeting changing housing needs in future, since any such award times by a negative multiplier would always be zero. Creative accountancy had frequently led to such needs being met within the main award, but the situation was far from ideal.

Swift v Carpenter addressed this anomaly within the regulations, replacing the Discount rate for accommodation needs with a reversionary-interest-based system, set initially at five per cent.

Obiter was created in 2018 to add further value to the group’s offerings as a more traditional wealth management service. Recognising that not all our clients’ wealth management needs are directly related to their awards, Obiter provides a full wealth management solution.

Obiter can advise on investing for income, capital growth, retirement income and offer a range of products and services to meet your needs. It also offers clients a specialist later life consultant, accredited by the Society of Later Life Advisers.

In 2017, some seven years after then-chancellor Kenneth Clarke had announced the Discount Rate review, his successor’s successor’s successor Liz Truss finally took action (Michael Gove had briefly occupied the role in 2015/16, but played little active role in the ongoing review). She took everyone by surprise when she did so.

Truss’s decision was that, given the negative interest rates of the time, claimants would actually be left worse off by investing their awards, so the Discount Rate should be set at -0.75% to reflect this. It’s safe to say that this pleased very few people. Insurers were understandably aghast that they were now expected to pay people higher sums than their awards to reflect the losses that years of investment would bring – potentially millions of pounds in complex cases.

The outcome was little better for claimants however. There was widespread anger among those who had settled claims just before the change in rate, only to learn that if they had waited a week they could have received an award two or even three times higher under the new rate, while unforeseen longer-term complications included the unintentional but very real end of awards for changing future accommodation needs.

Following concerted lobbying by the insurance injury, a new consultation was announced less than a month after Truss’s adjustment, which would ultimately raise the rate to -0.25% – still a negative figure, but not entirely without merit. It had been clear for some time to many in the industry that the existing 2.5% rate was utterly inappropriate, while the linking of awards to government guilds had proved totally unfit for purpose: Claimants should not be treated as “normal” investors, the latest thinking concluded, but nor should they be treated as “no-risk” investors, and a basket of low-risk investments would be a more appropriate benchmark.

Both of these issues were to some degree confronted by the review and the new rate, and some stability was brought to the market, at least until the next review comes around.

In 2016, Frenkel Topping established its own Charitable Foundation Trust to consolidate its continued commitment to support vulnerable people, carers and disadvantaged groups across England and Wales. Some of the foundation’s key priorities are to support the promotion of individual wellbeing, to help people maintain a healthy, positive life after life-changing events or in older age, and also supporting ‘hidden treasures’: third sector projects that support vulnerable and disabled clients, their families and their carers.

In particular, the Frenkel Topping Charitable Foundation aims to provide funding to projects that:

• Provide emotional & practical support, information and advice
• Provide services and funding to enable more independent living
• Advance medical research for the public benefit
• Advance education for public benefit and skills development

Following extensive studies of compensation systems in Australia, the EU, the US and Canada, the UK government decided in January 2013 that legislation should be enacted to provide for periodic payments in cases of catastrophic injury involving state defendants. It also agreed that the question of extending periodic payment orders to cases involving non-state defendants should be examined by the Department of Justice and Equality in cooperation with the Department of Finance.

In 2012, two years after its announcement, the first consultation into the Lord Chancellor’s review finally took place, and Frenkel Topping was invited to submit a detailed paper to the review and supply responses to a number of the consultations taking place over how the Discount Rate should be set, and what it should apply to. Much of Frenkel Topping’s work was included in the responses to the final consultation before the Discount Rate was eventually updated in 2017. It had been a long process, and it didn’t end the way many people had expected.

The discount rate for awards had originally been set as a means of ensuring that claimants were not overcompensated for their injuries. Simply, if a claimant was awarded a lump sum equivalent to £10,000 per annum over a 20-year life expectancy, the discount rate would be applied to reflect the earnings that could be made from that lump sum over the 20-year term. So, if a £200,000 lump sum was awarded and the claimant took the £10,000 required for year one, investing the remaining £190,000, the Discount Rate would account for this. Rather than paying the full £200,000 lump sum, an insurer would pay the full amount, less the discount rate, over the course of the term.

Over the years, the rate had been left largely untouched. In 1999 Wells v Wells had linked it to government gilt returns, asserting that claimants should not be treated as “normal investors” and setting it at 3% to reflect such low-risk investments, and following the slight 2001 adjustment to 2.5% it had stayed there ever since. In fact, since Wells v Wells had linked the Discount Rate to government gilts the returns on these investments had nosedived. The reality was that many claimants would actually lose money on their investments under the existing framework. The review announced in 2010 would seek to address this matter, alongside further related issues, though as with much in the world of government it would take some time.

The 2003 Courts Act, as the name implies, was actually passed in 2003, but it didn’t come into law until 2005, and two cases in particular highlight the importance of the legislation.

Godbold v Mahmood

By 2005, structured settlements/PPOs had existed for a decade and a half, but they were entirely reliant on the consent of all parties in the case. This consent was not always easy to win. Insurers had already become somewhat hostile to the model due to the potentially very long schedules of payment, but claimants weren’t always open to the concept of a PPO either.

In the early days of the model, before the tax status of the payments was settled with the 1995 Finance Act, PPOs could seem dauntingly complex from an administrative point of view, and an already prevalent culture of expecting large lump sum payments had only grown since Wells v Wells had eliminated the 18-year life expectancy multiplier in 1999. The concept of several smaller payments was somewhat alien to many in the industry, and only the most forward-thinking claim teams would actively seek this outcome.

The case of Kelly v Dawes, in which the claimant far outlived the term that insurers had originally attempted to settle for, had conclusively proved that in certain cases the PPO was undeniably the most appropriate form of recompense, however. The Court Act finally gave judges the power to impose such a settlement even without the consent of both parties.

Godbold v Mahmood was the first case to test these new powers. The case seemed to tick every box as an ideal candidate for a PPO as it involved a claimant with a long life expectancy; complex, long-term care needs, and high, recurring heads of damages. Neither party had indicated a desire to seek a PPO, however, with the defendants actually arguing that any future care costs would be picked up by the local authority.

The judge in the case, however, Mr Justice Mitting, was unconvinced, and used his new powers to instruct both parties to reach an agreement involving periodical payments. It was the first time a PPO had been imposed on a case by the court, and the defendant’s initial, index-linked £50,000 per annum would go down as a piece of legal history.

Thompstone v Tameside and Glossop Acute Services NHS Trust

The second defining case of 2005 was that of Lee Karl Thompstone, a seven-year old boy born with severe cerebral palsy as a result of anoxia at birth, for which the NHS Trust had admitted liability. The claimant’s team had already indicated that their preferred settlement would be a PPO, but there was an important addendum. The team submitted evidence that showed that a PPO linked to RPI, as was standard at the time, would not keep up with the increased cost of care over the claimant’s lifetime, and that the care component of the award should be linked to a more appropriate index.
The courts agreed, and to this day care costs are linked to the ASHE index, reflecting the real wages of those providing the care, rather than the more general RPI.

In the modern age, where financial products and services are available in infinite shapes and sizes everywhere from the high street to the phone in your pocket it may seem incredible, but in 1999 the court, through the Public Trust Office, had its own investment division, and that was the only place that was permitted to invest awards received by personal injury claimants under the care of the court.

The division employed just two stockbrokers, who were assigned claimants on an alphabetical basis, and offered a grand total of four investment strategies ranging from 30% cash/70% equites to 70% cash/30% equities. If you had a brain injury and were under the jurisdiction of the court, those were your, or your representatives’ choices.

Further, there was no tax planning, no use of tax-free benefits, no use of other assets like property or gilts, and no annual management fees – the stockbrokers made their profit solely from commission on buying and selling stock.

It was an incredibly old-fashioned and inefficient system, and utterly in opposition to the Wells v Wells assertion that personal injury claimants should not be treated as a “normal investor.” In fact, this system treated the claimant rather like a particularly wealthy and highly educated investor.

By lucky coincidence, in the same year as Wells v Wells was passed, the audit office happened to descend on the Public Trust Office, and they were not impressed by what they saw. Of the 47 KPIs that were in place for the investment division, it failed 39. The auditor’s report even went so far as to assert that, given that the division did not even have a computer and kept all its records on paper, had it been a private financial institution it would be shut down by the regulator.

With a new Master of the Court of Protection in place, a lawyer with whom Frenkel Topping had previously worked, and a client who was adamant she did not wish for her husband’s award to be taken into the care of the court, the company was successful in taking a test case directly to the Master of the Court.

Under normal circumstances, if a claimant wished to invest their damages themselves, or through an independent financial advisor, an application must be made to the Investment Division. If the money was to be invested according to the division’s own four strategies, approval would be granted, otherwise it would be refused. That would then require an appeal and eventually, maybe after a year or so, a hearing would be granted with the Master of the Court. The test case, and a handful more Frenkel Topping would bring over the over the following year or so, sidestepped this needless bureaucracy, and although there were several false starts, would eventually lead to the legislative changes of the 2003 Courts Act (active in 2005) and the dissolution of the Investments Division.

Frenkel Topping played a key role as a significant contributor to the Law Commission’s Papers and Finance Acts of 1995 and 1996. It was clear at the time that it would be highly desirable for legislation to pass which allowed the Life Office to pay the fledgling structured settlements/PPO in gross form and not have to deduct tax. Under existing rules they were required to do so, which the insurer would then have to gross again, causing unnecessary cost and administration, as already discussed.

There had not been a similar review of the tax status of compensation payments since the Pearson Report of 1978, and as such PPOs had become something of an anomaly having existed for seven years without any specific rules in place regarding their tax treatment.

Reviewing a situation and acting on the review, however, can be two very different things. The Pearson Report had itself recommended a raft of changes, but not a single one had been implemented by 1994.

It was on a routine visit to a London legal firm with whom Frenkel Topping was working on a claim that then-director, and current CEO, Richard Fraser found unexpected inspiration: “In the reception, they had a list of what they did, and one of those things was parliamentary lobbying,” he recalls. “I read all about that and said ‘look, if we want this to happen, we need to employ these people.’”

Frenkel Topping took on the lobbyists to push for the tax changes to annuities to make it into the 1995 Finance Act, and succeeded. In fact, Frenkel Topping’s requested amendment was the only one applied to the act, and is listed in Hansard in perpetuity as the Frenkel Topping Amendment.

The firm would once again become involved with the updated 1996 Finance Act to rectify the oversight that, at the time, insurance products including annuities and thus PPOs, were only subject to 90% protection in the event of an insurer becoming insolvent. The 1996 act corrected this to 100%, although Fraser notes with some relief that on this occasion a simple letter sufficed, with no need for the drama or intrigue of lobbying.

The principles were now in place for the development of structured settlements, and what we now know as Periodical Payment Orders, but it wasn’t plain sailing just yet. In these early days of the fledgling PPO, the process of establishing one was far from simple.

When a structured settlement was created at the time, in its simplest terms, the general insurer in the case would purchase an annuity from the Life Office. Under the legislation of the day, however, although the capital itself was tax free, the Life Office was required to deduct tax from the interest paid on the annuity. In practice this meant that the Life Office would deduct tax from the annual sum it paid to the general insurer, then the insurer would have to gross the sum back up to pay the claimant the tax-free sum. It was complicated, convoluted, and expensive – a typical £500,000 settlement could see the insurer claiming back as much as £50,000 for administrative costs over the lifetime of an annuity.

With this in mind, it’s perhaps understandable that structured settlements didn’t fly off the shelves in the early days. What was needed was a test case with a claimant who was eager to trial the new model. In 1989, one finally emerged, and Frenkel Topping was alongside them to create the very first structured settlement of its kind in UK legal history.

Kelly v Dawes

In July 1986 Catherine Kelly, a recently married nurse aged 22, had suffered serious injuries in a road accident. Her husband was killed in the accident, as was the driver of the other vehicle, who was found to be wholly to blame. His insurers settled the claim arising out of her husband’s death with a lump sum payment.

As a result of her injuries the plaintiff was, in the words of Judge Potter, “transformed from a lively young woman … into a bedridden invalid with grossly impaired neurological functions, almost totally unaware of her surroundings, totally dependent on skilled nursing care and the devoted attention of her loving parents and family.”

Her life expectancy was difficult to assess. Plaintiff lawyers suggested a period of ten-to-twenty years, defendant lawyers five-to-ten.

Kelly’s father, who himself worked in insurance as a broker for Prudential, wasn’t happy with this, and was particularly concerned about what would happen to his daughter in the event she outlived him. A structured settlement that would be paid to his daughter for life was an obvious solution. John Frenkel himself suggested the new model, and with the family and both sets of lawyers in agreement the stage was set.

Frenkel Topping’s specialist advisors devised an agreement whereby the £427,500 lump sum payable on a conventional basis would instead be paid as a structured settlement of £410,000. Of this, £110,000 would be paid immediately as a lump sum, and £300,000 would be used to provide a tax-free, index-linked annuity for the rest of the plaintiff’s life. The initial £25,652, index-linked annuity was guaranteed for 10 years, after which it would be renewed and crucially, when the agreement was approved in July 1989, allowance for the intervening inflation in medical care costs was also made. The settlement was truly ground-breaking.

In 1999, Kelly and her family’s willingness to act as standard bearers was vindicated. She had outlived the defendant’s longest estimate of 10 years, and the annual, tax-free annuity was increased to £36,618.

Her father said at the time: “I wanted the certainty of knowing that money would be available for the rest of Cathy’s life. Looking back, the medical experts’ view on her life expectation ranged from 5–10 years to 10–20 years. Physically, Cathy is in better shape now and if they come back today, they would say that she could live another 20–30 years from now. They got it wrong…. I have absolute peace of mind in knowing that, even if I am no longer here, there will still be money available for Cathy’s needs for the rest of her life.”

The case would act as a catalyst. Following this sole structured settlement in 1989, Frenkel Topping would create a further four in 1990, followed by 300 in 1991, and from there the model became ubiquitous.

In an unexpected side effect of the thalidomide scandal in Europe, the structured settlement was introduced in the US and Canada, and the American IRS agreed that these annuities should be tax free. It was this model which would eventually inspire the creation of Periodic Payment Orders here in the UK.

Thalidomide, the notorious German drug that led to perhaps the greatest medical scandal in history, was prescribed to pregnant women as a sedative and to relieve morning sickness in the fifties and sixties. It went on to cause major defects in its users unborn children, with severe cases born without limbs or functioning kidneys.

The drug was never licenced for use in the US, but American mothers-to-be weren’t entirely shielded from its effects. Around a dozen US service personnel and their families based in Europe were prescribed the drug, while around 20,000 Americans also took part in clinical trials on US soil.
With no idea how long their children may live, it was these families who pushed, through the US courts, for their children to be compensated on a tax-free annual basis rather through the traditional lump sum method. The structured settlement was born.