Justice Committee

Meeting date: Tuesday, March 17, 2020

Official Report 540KB pdf

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Subordinate Legislation

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Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (Success Fee Agreements) Regulations 2020 [Draft]

Agenda item 2 is consideration of an affirmative instrument: the draft Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (Success Fee Agreements) Regulations 2020. I welcome the Minister for Community Safety, Ash Denham, and her Scottish Government officials: Hamish Goodall, from the civil law and legal system division, and Heather McClure, from the legal directorate.

I refer members to paper 1, which is a note by the clerk and includes submissions received from stakeholders, and I invite the minister to make a short opening statement.

Good morning. The regulations will, for the first time, regulate the use of success fee agreements in Scotland. Success fee agreements, particularly damages-based agreements, are sometimes referred to as no-win, no-fee agreements, whereby the client pays nothing if a claim is lost but pays a percentage of damages achieved to the provider of relevant services if the case is won or settled. Success fee agreements can be used as a means of financing a wide range of civil proceedings, but they are most commonly used in personal injury cases. The vast majority of personal injury claims are now financed in that way, rather than through legal aid.

Success fee agreements represent a major contribution to access to justice, particularly for people who may not be eligible for legal aid and may not be able to finance a claim in any other way. Although damages-based agreements, based on a percentage of the damages achieved, have been in use for some time, solicitors have not until now been able to offer such funding to clients. They have been used by claims management companies, some of which are owned by large firms of solicitors. Section 2 of the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 now permits solicitors to offer such funding, thus increasing competition.

I draw your attention to regulations 2 and 4 in particular. Regulation 2 sets out caps on the success fee that may be charged under such agreements. The purpose of that is to make the cost of litigation more predictable, thus increasing access to justice through a more accessible and affordable means for people to enforce their legal rights. The levels of those caps on success fee agreements were recommended by Sheriff Principal James Taylor in his review of the expenses and funding of civil litigation in Scotland.

Regulation 2(6) makes it clear that only one success fee may be charged and regulation 4 sets out what must be contained in success fee agreements in Scotland. Regulation will also be provided for solicitors by the professional rules of the Law Society of Scotland and for claims management companies by the Financial Conduct Authority. General consumer protection legislation will also apply—for example, a cooling-off period will apply under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013.

The proposed regulations on success fee agreements are intended to be relatively light touch, and the intention is that the regulations will ensure that the potential costs are clear to would-be litigants and that such persons compare agreements that are broadly similar. I recommend the regulations to the committee.

Before I ask for questions from members, could you clarify what you said in your opening statement about claims management companies that are composed of solicitors being the only ones that—if I picked you up rightly—operate no-win, no-fee arrangements? Is that strictly true?

The majority of companies that operate no-win, no-fee arrangements are claims management companies, which are often owned by firms of solicitors. They are the ones that operate damages-based agreements at the moment.

Is it your position that no individual firms—

Solicitors have not until now been able to offer those arrangements.

So none of them has up until now.

That is correct.

I invite questions from members.

Good morning, minister. For full transparency, I declare an interest up front as a solicitor with a current practising certificate in England and Wales and Scotland, and as an employment law specialist who represents people in employment tribunals.

You have previously told Parliament that the Scottish ministers are committed to the principle of people who have sustained life-changing injuries receiving 100 per cent compensation. Given that premise, how do you justify a success fee that takes part of the compensation for future loss and gives it to the solicitor as a bonus?

I think that you are asking specifically about the issue of success fees coming out of the future loss payment. Sheriff Principal Taylor considered that approach as part of a careful consideration process that went on for about two and a half years. He has advocated the sliding scale approach, primarily for its simplicity.

We know that most cases do not make it to court. It would be quite difficult to separate out the heads of loss—in fact, I do not believe that that is commonly done.

But it could be done.

It could be done, but it is not done at the moment. Of course, 95 per cent of such actions are settled out of court. When that happens, periodical payments are an option. If periodical payments are included in the arrangement, they are automatically excluded from a calculation of the success fee.

Forgive me, but I am not sure whether that answers the question. I will come back to periodical payments.

I will phrase the question in a different way. As I understand it, an injured person’s solicitor already gets paid for the time that they spend on the case and the expenses that they incur. They can then apply for an additional payment of judicial expenses, and I believe that the court usually awards more than 100 per cent of their costs.

If that premise is correct, how do you, as a minister, justify a further payment being taken from the injured person’s compensation award and given to the solicitor as a success fee? Secondly, what evidence is there that a financial incentive is required to get solicitors to take on such cases?

Sheriff Principal Taylor considered all those points. To address your point about the additional payment, our understanding is that that applies in only a very small number—about 5 per cent—of cases. It is unlikely that a lump sum of less than £0.5 million would include an element of future loss, and when the sum is more than £0.5 million, the fee is restricted to 2.5 per cent.

I will put the issue in context. At the moment, the system is completely unregulated. There are claims management companies out there that we know are charging fees of 25 per cent; indeed, in some cases, fees of up to 33 per cent are being charged. We are simply seeking to regulate that.

I will give the committee an example of how things will work if the regulations are put in place. Let us say that £1 million was awarded as a result of clinical negligence. Currently, a claims management company might charge a fee of, say, 20 per cent, so in that case the fee would be £200,000. Under the regulations that are in front of the committee, the company would receive a maximum of £72,500. The application of the sliding scale results in a considerable difference.

I accept that that is important information, but it is in our papers.

Do you have any evidence that a financial incentive is required to get solicitors to take on cases, especially those involving figures of more than £500,000?

I understand that Sheriff Principal Taylor considered that and thought that it was a factor, but Hamish Goodall might be able to provide a bit more detail.

To look at the issue from the point of view of incentivisation is to look at it from the wrong side; we must look at it from the point of view of the client. Unless someone has a lot of money, they will not be able to raise a personal injury action.

At present, the insurance industry has told us that if you suffer a catastrophic personal injury, you will have no difficulty in finding a solicitor or a claims management company to take that claim forward because there will be a big damages payment and therefore the provider of the relevant services will get a big fee. At the other end of the scale, if someone is eligible for legal aid, they will be able to finance their personal injury claim through legal aid, although legal aid financing of such claims now is very rare.

The vast majority of personal injury claims are now being financed by success fee agreements—damages-based agreements. It is about what Sheriff Principal Taylor called the “excluded middle”—people who are not eligible for legal aid, who may not be able to raise an action. They need to have some other means of financing that action, and that is what the success fee agreement provides.

Sheriff Principal Taylor spent two and a half years coming up with the success fee caps and his view is that they represent a fully considered compromise. He had a policy advisory group to advise him, with representatives from the insurance industry, insurance lawyers and pursuer personal injury solicitors. The caps that they came up with are a fully considered compromise; they think that they are fair to everyone. It is intended that not only will the client get the vast majority of the damages that are claimed but the solicitor will get a reasonable return on the risk that they are taking.

You might be interested to know that one firm of solicitors told us that when it was raising a catastrophic personal injury case on behalf of a client, its outlay on the case was £175,000. In order to be able to exercise a person’s legal rights, the solicitor has to get a reasonable return on their outlay.

It is rare—in any jurisdiction in the world—for a pursuer to get 100 per cent of their damages, because they have to pay for their legal advice. Even though you will get your damages from the other side, according to the law, you still have to pay your lawyer. Therefore, you will not get 100 per cent of what you were awarded or what was agreed on in a settlement.

I am aware that a lot of the current committee members were not committee members when we looked at the bill that became the Civil Litigation (Expenses and Group Proceedings (Scotland) Act 2018, and I notice that you have made no reference to the committee’s scrutiny of that bill and the committee’s distinct and firm recommendation that damages for future loss should be protected. Future loss is to cover the expenses that an individual has because of something that has happened—it could be to cover their physical care, their mental care and so on.

The committee was absolutely solid on the point that damages for future loss should be protected. This Scottish statutory instrument says that they are not going to be ring fenced. To quote directly from our stage 1 report on the civil litigation bill,

“Should damages for future loss not be ring-fenced, then the Committee considers that the court must have the power to make a periodical payment order.”

You have said that periodical payments will be protected, and for good reason, because they are about covering future loss, including lost earnings, to safeguard a person’s wellbeing.

At that time—we are going back to December 2018—the committee also noted that

“the Scottish Government intends to introduce such a power in its forthcoming Damages Bill. The Committee considers that the provisions of this Bill should not be brought into force until such time as the court has the power to make a periodical payment order.”

That bill is now the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019, but part 2, which gives the power to make those periodical payment orders, has not been brought into force.

It therefore seems to me quite outrageous that we should have before us today an SSI that does not ring fence those future earnings and that the Government has not taken the steps that it easily could—because the legislation is waiting to be brought into force—to protect people through the introduction of periodical payment orders.

10:15  

You make a good point, which I totally take on board. I would make a couple of points in reference to it. First, as I stated before, 95 per cent of personal injury actions—that covers the majority of what we are discussing this morning—do not make it through the court doors. Periodical payments are, therefore, still available as an option in that regard, and those sums of money would obviously not be included in a success fee.

You are also right to say that the periodical payment arrangements were included in the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 and that they have not yet been commenced. Of course, that is a matter for the Scottish Civil Justice Council.

Could you explain that further?

It is developing the rules of court. It is working through that on a sequential basis and, unfortunately, it has not given us a timeframe for when it expects to conclude that work.

What representation has the Government made, given that it is in a position where it is not approving the ring fencing of those future earnings? Is it acceptable that there has been such a delay? What communication has there been with the Scottish Civil Justice Council?

I am afraid that we are unfamiliar with what steps have been taken in relation to the commencement of that act. It is worth making the point that periodical payment orders can be made only by a court, but only 5 per cent of personal injury actions—

You have made that point quite forcefully. However, the point is that you are coming here today to ask us to approve not ring fencing those very important future earnings and it seems that no attempt has been made to find out why there has been delay in implementing part 2 of the 2019 act, which would have solved the problem.

My understanding of the situation is that the Scottish Civil Justice Council has work pressures and is working through its workload on a sequential basis, and that it has not given us a date for when part 2 of the 2019 act will be commenced.

But the Government has not formally written to it to express concern about that.

The Scottish Civil Justice Council prioritises its own workload, and works through it at its own pace.

I remind you that the reason why we are bringing in these measures is to protect people who are involved in that 5 per cent of cases that you mention, who are currently vulnerable. The situation seems unacceptable to me.

Good morning. The 2018 act was one of the most complex pieces of legislation that I have dealt with in my time in Parliament. We are here not to revisit it, but to deal with some of its consequences.

Minister, I do not know whether you have seen some of the evidence that the committee has received. Thompsons Solicitors says that it fully supports

“both the policy objectives and drafting of Regulations.”

I would like you to comment on two specific points. If part of the claim involves the pursuit of a criminal injuries compensation claim, what are the implications of that for solicitors’ fees?

Another aspect about which concern has been raised involves circumstances in which a client changes solicitor. How would the fees be divvied up thereafter?

In a situation in which a client has one solicitor who does some work on the case and then, for whatever reason, the client or the solicitor decides not to proceed with the claim, but, with another provider, the claim goes on to become successful, the regulations ensure that the client will only ever pay one success fee. That is an important principle of this set of regulations.

The cap in respect of criminal injuries is not covered under the regulations. They refer only to civil litigation proceedings.

May I press you on the first point? Where there is a change of solicitor, the suggestion, which does not seem unreasonable, is that each firm receives a fee that is

“proportionate to the amount of work that each contributed to the overall work undertaken to bring the matter to a successful conclusion.”

Is the matter adequately covered? Is there a gap in provision?

We understand that, at the moment, it is quite common to include clauses in damages-based agreements whereby if a first provider has concluded that a claim is not going to be successful and withdraws and a second provider or relevant service is successful—and only if they are successful—the client might be liable to the first provider for some of the outlays on the case.

We do not think that that happens very often. If one firm of solicitors thinks that a case is not going to be successful, it is not often that a second firm thinks that the case will be successful.

We are not aware of such provisions causing difficulty at the moment. We consulted on the matter during the winter of 2018-19, and responses were very mixed between people who thought that such an approach should be banned and people who thought that it was fair, because a first provider might well have done a lot of work on a case and thereby contributed to its success, albeit that the success had ultimately been achieved by another provider.

We decided not to put anything on that in the regulations, but of course post-legislative scrutiny of the legislation is due in three years, so if by that time there is evidence that such arrangements are causing difficulty, we can come back and address the matter.

I was going to ask about that, because it will be only in the light of experience of operating the regulations that some of this will become clear. Would the Government be minded to address the issue?

If the evidence is that the provisions are causing difficulty, yes, but as I said, I do not think that such cases often arise.

May I address the point that the convener made, perhaps from a slightly different angle?

The success fee applies only when the injured person opts to take compensation as a lump sum. It does not apply, and therefore the compensatory award is not reduced, if it is taken as a periodical payment order. That means that if a solicitor advises their client to take a lump sum award, the solicitor will benefit from the success fee payment. Sheriff Principal Taylor, to whom you referred, minister, told the committee that that created a potential conflict of interests for the solicitor. Are you comfortable with building an inherent conflict of interests into the system? In the context of what the convener said, should the approach be delayed until part 2 of the 2019 act is brought in?

You might be conflating several issues there. In the event of a settlement of more than £1 million, the solicitor will be required to obtain either the approval of the court, in the case of an award, or a report from an independent actuary, in the case of a settlement, certifying that it is in the best interests of the pursuer that the damages should be paid by way of a lump sum rather than by periodical payment, before the solicitor will be entitled to be paid a success fee from the future loss element of an award of damages. That approach is built in to address the issue that you raised.

I am not sure that I followed that, minister—but forgive me, I am slightly deaf in one ear today, so I might not have heard you correctly. Is there not a risk that, as Sheriff Principal Taylor identified, we are building an inherent conflict of interests into the system for the solicitor who is advising on whether to take a lump sum payment, which will yield a success fee, or a periodical payment order, which will not?

Indeed. That is why Sheriff Principal Taylor advised that the solicitor will be required to get a report from an independent actuary to make sure that the lump sum is in the interests of the pursuer and that a periodical payment would not be better. That should go some way to address the member’s concerns.

It does, potentially. I will ask the second part of that question again. As the convener suggested, is there not merit in delaying what we have before us today? I heard the representations from Hamish Goodall about the fact that you appear to be beholden to another agency. Would it not be better to delay the regulations until part 2 of the 2019 act is brought in?

I am looking at it in the wider context. If claims management companies, and their fees, are currently completely unregulated, it is better to approve the regulations, so that they may be regulated. The caps on fees will be enacted and the amounts that solicitors or claims management companies receive will be subject to the caps. The system will be transparent and simple for everyone to understand, and some success fees will be brought down to a more reasonable amount.

Thank you.

I will add to that. At the moment, there are two problems with civil litigation. The first is that people fear what they will have to pay their solicitor to pursue their case. The other problem is that they fear what they might have to pay the other side if they lose the case. Part 1 of the 2018 act, on success fee agreements, addresses the first problem. Success fee agreements—and the caps thereon—make what people will have to pay their solicitor to pursue their case predictable. Part 2 of the 2019 act, which is waiting for rules of court from the Scottish Civil Justice Council, will provide for qualified one-way costs shifting. That means that, even if a person loses their personal injury action, they will not be liable for the costs of the other side: the other side is likely to be a large, well-resourced insurance company, whereas the person is Joe Public.

I will follow John Finnie’s line of questioning in relation to the Thompsons submission on success fees. It looks as though there is an inconsistency in approach in relation to success fees for criminal injuries compensation. Where a success fee applies, the solicitor’s fees can be recovered only from part of the client’s damages, whereas, in all other personal injury cases, part of the solicitor’s fees can be recovered from the compensator.

The legislation is concerned only with civil litigation and has nothing to do with criminal injuries compensation, so it is not the appropriate place to make provision regarding criminal injuries compensation.

Sheriff Principal Taylor did not consider criminal injuries compensation in his report. The convener will recall that it was never raised during the six evidence sessions on the bill.

The bill referred to civil litigation, so the claims are all civil.

Minister, you said that, if we approve the SSI, some success fees might be brought down to a more reasonable amount. However, because the rules of court have not been produced by the Civil Justice Council—it has delayed them—if a lump sum is paid, future earnings are vulnerable. If solicitors take their fee out of those future earnings, and they advise their client to take a lump sum, there is a potential conflict of interests.

Would you consider going away and looking at the instrument again? It does not have to be approved until 29 March. It seems reasonable for you to go back to the Civil Justice Council to find out the reason for the delay, because it is in a position to enact the legislation. That would allow the court to make periodical payment orders and to protect those valuable future earnings for vulnerable people, who need to be assured that the full amount can be put to the intended purpose.

I ask you to delay the regulations for a week, and to go back and look at them. The committee could then look at them again and decide. At least we would then have the reassurance of knowing that absolutely everything had been done to get what should be happening, with arrangements under part 2 of the 2019 act brought in to allow periodical payments and, crucially, to protect future earnings.

10:30  

I understand what you are saying, and I can see that you are very concerned about the issue. I reiterate that the concerns that the committee has raised are applicable to only around 5 per cent of cases, which is a very small number. It is also important to make it clear that the Scottish Civil Justice Council is not accountable to the Scottish ministers. Obviously, Sheriff Principal Taylor and his policy advisory group looked into the matter over a number of years, and those on both sides of the argument were involved. There is a fully considered compromise on the fees, and implementing the cap will be very beneficial. This is an access to justice issue.

The committee scrutinised everything that was done under Sheriff Principal Taylor’s recommendations. I remind you that there was a considerable delay from when he first made the recommendations to our getting anywhere near looking at them.

Although more protection may be provided, there is nothing like the protection that should come from the solution that the committee recommended when it produced its stage 1 report all the way back in December 2017. Such protection would allay the committee’s fears. The Scottish Civil Justice Council is not accountable to the Scottish Government, but I do not think that quantifying the number as only 5 per cent of cases—the number may be only 5 per cent, but individuals need the money—is a legitimate argument for not going back, double checking and seeing whether there is a reasonable explanation for why the rules of court cannot be brought into force sooner rather than later. Again, I ask you to reflect on that.

Are there any other comments?

I have a small point of clarification. The minister said that the concerns apply to only 5 per cent of cases and that that is a very small number. I see that that is 5 per cent against 95 per cent, but can the minister put any flesh on the numbers? How many cases make up that 5 per cent? How many cases are we talking about? What is the financial value of that 5 per cent? Is that information available?

I am not sure that it is available. Does Hamish Goodall have anything on that?

No, I do not. However, it is a fact that, currently, in 95 per cent of cases, personal periodical payment orders are available if the parties agree to them. At the moment, a court does not have the power to impose a periodical payment order. That is the change that was made in the 2019 act. There can be periodical payment orders at the moment, and apparently the national health service is very keen on paying out damages by that method.

Basically, Sheriff Principal Taylor did not differentiate between lump sum payments for past loss and for future loss. He thought that the system should be as straightforward as possible so, if the money were paid in a lump sum, it would be liable to the calculation of the success fee. He pointed out that settlements are very often made at the door of the court and that, if they are made, they will be broad-brush settlements and the parties will almost certainly not distinguish between past loss and future loss. If we were to change that situation, there might be satellite litigation between the solicitor and the client because, if there could not be a success fee on future loss and there was a settlement at the door of the court, there might be an argument between the client and the solicitor about which bits should be liable to the success fee.

Sheriff Principal Taylor’s rationale was that it is much more straightforward to make the entire lump sum liable to the success fee. However, in cases that are worth more than £1 million, the solicitor will require to obtain either the approval of the court or a report from an independent actuary that it is in the best interests of the pursuer that the damages should be paid by way of a lump sum, rather than as periodical payments. That is in sections 6(4) to 6(8) of the 2018 act.

I am not sure, convener, whether you are proposing that we put off making a decision today or go to a vote, but if the minister remains minded to move her motion, I will be happy to vote for it. I feel reassured by what she has said; it is an issue of access to justice.

You have articulated the concerns very well, convener, as has Liam Kerr. I am pretty sure that they will be taken on board. We have already heard that post-legislative scrutiny is built into the legislation.

In my view, this is an access to justice issue. We have already heard that there have been delays; we should go ahead and make sure that the vast majority of people get what they should.

As committee members have no further views to offer—I think that we have exhausted our discussion—we will move to item 3, which is formal consideration of motion S5M-21029. The Delegated Powers and Law Reform Committee has considered and reported on the instrument, and has no comments. The motion will be moved, with an opportunity for formal debate if necessary.

Motion moved,

That the Justice Committee recommends that the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (Success Fee Agreements) Regulations 2020 [draft] be approved.—[Ash Denham].

Do members have any questions or comments?

I do not know how many people around the table were involved in this very complicated legislation, and I do not think that the intention of the minister’s proposal is to revisit its merits—we are where we are.

I raised two concerns, and I am happy that they will be picked up subsequently. I will repeat the quotation that I read out earlier:

“Thompsons Solicitors fully support both the policy objectives and drafting of Regulations.”

In addition, the Law Society of Scotland made a four-line submission, the last two lines of which say that:

“The regulations produced are designed to provide clarity to the profession and protect the public interest.”

I am content that we vote on the motion today.

I thank Mr Finnie for that comment.

Before we move on, can the minister confirm for me that, for the 95 per cent of cases that do not come to court, periodical payments are very unlikely to be used in settlements?

No; I think that periodical payments would be more likely to be used in settlements.

What is the basis for that?

It just has to be agreed between—

Is it correct that the officials are not allowed to speak at this point?

Yes; that is correct.

My understanding is that the most appropriate type of settlement is a matter of agreement between the parties.

No other member wishes to speak.

I am sufficiently concerned that, rather than the instrument helping to improve the situation to safeguard future earnings, the checks and balances are not there. I asked the minister whether she would consider a delay; she indicated that she will not. In those circumstances, I say with regret that I will vote against the motion.

The question is, that motion S5M-21029 be agreed to. Are we agreed?

Members: No.

There will be a division.

For

Allan, Alasdair (Na h-Eileanan an Iar) (SNP)
Finnie, John (Highlands and Islands) (Green)
Kelly, James (Glasgow) (Lab)
Kidd, Bill (Glasgow Anniesland) (SNP)
MacGregor, Fulton (Coatbridge and Chryston) (SNP)
Robison, Shona (Dundee City East) (SNP)

Against

Kerr, Liam (North East Scotland) (Con)
Mitchell, Margaret (Central Scotland) (Con)

The result of the division is: For 6, Against, 2, Abstentions 0.

Motion agreed to,

That the Justice Committee recommends that the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (Success Fee Agreements) Regulations 2020 [draft] be approved.

Is the committee content to delegate to me the publication of a short factual report on our deliberations?

Members indicated agreement.

I thank the minister for attending today. I suspend the meeting briefly, for a change of witnesses.

10:39 Meeting suspended.  

10:42 On resuming—  

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Police Pensions (Amendment) (Scotland) Regulations 2020 (SSI 2020/33)

Agenda item 4 is consideration of a negative instrument. I refer members to paper 2, which is a note by the clerk. Do members have any comments on the Scottish statutory instrument?

I refer members to my entry in the register of members’ interests. I am the recipient of a police pension. Although I do not believe that any of the instrument’s provisions will have any implications for me, it is important to put that on the record.

That is duly noted.

As there are no other questions or comments, are members content not to make any recommendations to the Parliament on the SSI?

Members indicated agreement.