THE BLOG

Investment, Incapacity and the Risk for the Vulnerable

20/06/2013 11:14 BST | Updated 18/08/2013 10:12 BST

The business of managing one's money has become particularly tricky in recent years.

Savers have seen the interest rates offered by high street accounts shrink while the cost of living has continued to move ever higher.

Whilst that constitutes a headache for many of us, it represents a serious concern to those individuals left incapacitated by illness and serious injuries whose money pays for desperately needed care.

They include people given substantial compensation by the courts after sustaining very severe injuries, as a result of which they need intensive support well into the future.

Not so long ago, they were able to leave their money in a single account established by the Government which was intended to generate sufficient interest to pay for that care. However, there are concerns that they rates provided by the Court Funds Investment Account (CFIA) may not serve its original purpose.

The problem doesn't lie with the money markets and private banking sector. Interest rates for the CFIA are set by the Lord Chancellor - a post currently held by Justice Secretary, Chris Grayling - in consultation with the Treasury. It's not even down to the current ruling coalition.

Rates have remained very low since 2009, when they fell from six per cent to just 0.5 per cent - a staggering drop of more than 90 per cent - in the space of a matter of months.

Such a move might be expected to trigger an exodus of people taking their cash out of the CFIA and depositing it elsewhere. However, the high street offers poor returns and complications.

Following the collapse of Northern Rock in 2007, the Government set limits on how much of a saver's cash it will guarantee in the event of further bother in the banking industry.

That means individuals with very large compensation awards might have to open dozens of accounts to protect all their money.

As a result of those factors and the perceived risk of the Stock Market, many have chosen to stay put in the CFIA. In fact, according to the Ministry of Justice, the CFIA still contains some £3.3 billion in cash and securities on behalf of 140,000 people.

That money is held under the control of the civil courts in England and Wales, including the Court of Protection, a body which has jurisdiction over the property, financial affairs and personal welfare of people who are adjudged as lacking the mental capacity to make key decisions for themselves.

The CFIA's interest rates show no sign of picking up, at least not yet, while care bills are on the rise. The net effect is that costs can't be met from interest alone and so the capital - the compensation award itself - is being eaten into.

Depending on the degree of care needed and the costs for providing it, there are genuine fears that we could well see people forced to turn to the state for help in the long-term because they have simply exhausted their compensation.

That scenario would be anything but ideal for the individuals concerned or the Government, which would have to meet the ongoing care costs.

Given the constraints around all of their spending commitments, ministers cannot simply write a blank cheque or increase the CFIA's rates at a stroke.

This is arguably one case in which measured reliance on the markets can produce the necessary returns without dramatic exposure to risk.

Whatever happens, the debate about interest for some of the country's most vulnerable is something which we will watch with interest.