With the financial industry often being baffling for some, Nick Leech states that there are many areas of financial matters which can cause confusion outside the financial industry.
“The issues tend to be different pre or post-settlement but the most common ones in the general context of personal injury would include: how to allocate the settlement award between lump sum and periodical payments; understanding the differences and impact of price and earnings related inflation on clients’ long-term funds; recognising poorly performing and costly investment portfolios that carry unnecessary risk; understanding how damages awards interact with the welfare state and HMRC taxation rules in the UK”, says Nick. We question him this month, on what happens with the financial world meets the legal sector.
You have been involved in developing specialist investment strategies for the personal injury marketplace. Why are such strategies required?
Personal injury compensation is calculated using well-established legal principles that involve discounting future losses attributable to the injury to present day values using a discount rate based on ‘real’ (after price inflation) investment returns. The assumption is that the compensation should be adequate to cover the period of loss, but will not provide a better financial position than would have been the case apart from the accident (Lord Oliver, Hodgson v Trapp [1989] AC 807).
Effectively, the investment of that compensation needs to incorporate and factor in the legal and discount rate principles, inflation (prices and earnings) in a low-risk environment for investors who very often have suffered catastrophic, life changing injuries resulting in individual short, medium and long-term requirements. In order to achieve this, bespoke portfolios and robust processes are required. Space precludes a fuller analysis but one can be found in Personal Injury Law Journal May 2017 - A Lifetime Commitment.
Do you think the legal profession and finance world work well during litigation? What changes do you think would be of benefit?
From my experience, I genuinely believe that the gap isn’t that great. As ever though, the situation might be improved. Perhaps the CPR could be enhanced in this area by an appropriate practice direction/addition to the present practice direction. For example, prior to the implementation of PPOs by the Courts Act 2003, consideration of their precursor, structured settlements (which could not be ordered by the Court as the regime was consensual), was greatly assisted by such an arrangement. The practice direction at the time made it compulsory for the parties to consider structuring part of the award, in cases where the claimant was a child, or lacked capacity, and the future losses were in excess of £500,000. Expert input was therefore, the norm pursuant to that practice direction.
It could be that additional practice directions in the CPR be provided, setting out very clearly what type of case must have specialist financial advice to ensure all options are analysed. Conversely, this could be viewed as too much ‘centralised’ interference, despite being founded upon well intentioned principles - the protection of largely financially vulnerable individuals. I favour a clear practice direction akin to the former, but of course I would say that!
What type of cases might make use of Periodical Payment Orders (PPOs)? How might the PPO framework be improved since Courts Act 2003 granted wider powers to the Court?
The vast majority of cases including a PPO as part of settlement are those of catastrophic proportions. In other words, very serious injury, with lifelong consequences. Also, cases involving a liability reduction, are less likely to involve expert advice about the format of the award. Traditional thinking amongst legal practitioners is often that a lump sum award is usually preferable in such cases. This may be correct in claims with a very substantial discount, but such opinion appears to be derived from the misconception that a lump sum might be invested with the result that the shortfall could be reduced over time. The reality is that large shortfalls will not be reduced as a result of investment returns based on caution. The effect therefore, can be that investment risk is introduced into a reduced value claim, often unnecessarily. By contrast, a PPO can provide certainty in such situations and appropriate expert advice would assist with evaluation on a case-by-case basis.
Is there anything else you would like to add?
In our experience, claimants are not advised at all how to invest lump sum damages during settlement negotiations. In circumstances where Nestor are instructed to act as expert witness in relation to periodical payments, it would be considered a conflict of interest to give specific advice on how to invest a lump sum. IFAs such as Nestor compare the options of periodical payments versus lump sums on a generic basis pre-settlement for Court purposes. Nestor are approached for investment advice only after the claim has settled. Solicitors and barristers are not authorised or regulated to provide investment advice at the time of settlement and IFAs are not instructed to discuss investment matters, even on a generic basis, with claimants prior to settlement. In our experience, investment considerations often come as a shock, and are perceived as another ‘problem’ to deal with by claimants’ post-settlement, especially in situations where they do not have any ongoing assistance from a Court of Protection appointed professional Deputy or professional Trustee. In Nestor’s experience, many claimants do not have any experience of investing significant sums of money (often millions) and they are worried and daunted by the responsibility of taking investment decisions. At present, the system and the law does not allow for costs of investment advice to be recovered either prior to settlement (unless it is to cover the cost of periodical payment advice), or post-settlement. We believe strongly that this is something that ought to be addressed in order to improve understanding and outcomes for claimants.
Nestor are also of the view that lawyers settling claims ought not to be allocating damages between periodical payments and lump sums without the assistance of expert IFA advice.
Before joining Nestor, Nick enjoyed a successful career spanning 20 years within the financial services sector. Nick started out with a blue chip bank before taking three years out to obtain a Law Degree. He resumed his banking career before assuming an instrumental role in the launch and development of the Manchester franchise of a national IFA brokerage. Since then, he has gone on to develop relationships within the professional service sector and maintains good working relationships with a number of key influencers.
At Nestor, our focus is simple - our clients are our business.
Clients bring us many questions, and we take pride in the quality of our answers and the success of our recommended solutions.
Nestor is a team of experienced, Independent Financial Advisers working with a wide range of clients throughout the UK. We specialise in providing services to personal injury and clinical negligence legal practitioners and their clients.
Many years’ experience in the personal injury field has established Nestor as the ‘expert of choice’ in
pre-settlement issues and post-settlement awards. Nestor is a key partner to many lawyers acting for personal injury claimants nationwide.There are many potentially suitable investment strategies that could be adopted by claimants. At Nestor, we have a range of solutions for our clients and recommend an investment strategy only when we have established the client’s needs as well as attitude to risk. There is no such thing as one right answer. All of the external investment managers recommended by Nestor must meet our strict due diligence criteria, and are subject to quarterly scrutiny from Nestor’s Investment Committee.
Nick Leech LLB (Hons) DipPFS
Director
- 0161 763 4800
- +44 7917352240
- nick.leech@nestor.co.uk
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