UK: "Transforming Regulatory Enforcement" - An Opportunity To Shape Future Regulatory Enforcement?

Last Updated: 23 September 2011
Article by Nicola Williams

Businesses have until 16 September 2011 to respond to the DBIS "discussion document" – Transforming Regulatory Enforcement: Freeing up business growth. This document has received surprisingly little coverage or commentary, despite the fact it was published by DBIS on 24 June. Are utilities companies missing an important opportunity to shape the future of regulatory enforcement?

The discussion document is effectively a "pre-consultation consultation" with the industry. It is an opportunity to influence views before DBIS formulates its proposals. The government has indicated that it will publish a white paper on the future of regulation in the Autumn and that it is using this preliminary period to gather views.

Procedural shortcomings will be particularly familiar to utilities and energy companies that have been the subject of regulatory enforcement proceedings. However, the focus of the debate which the discussion document is intended to encourage is far too broad and general to take into account the particular issues faced by utilities. The examples given in the discussion document relating to under-age and the red tape facing many businesses, particularly SMEs, are clearly topics worthy of further debate in themselves, but debate about the regulatory procedures adopted by the utilities and competition regulators is also long overdue, and needs to be focused on the key issues faced by the sector.
Given the numerous and conflicting challenges faced by utilities companies and the regulators' self-professed focus on a "risk-based" approach to regulation, it is all the more important that regulators are clear about their expectations of regulated companies and that procedures adopted for regulatory investigations and enforcement proceedings are scrupulously fair. There are basic standards of fairness and natural justice which regulators must adhere to, but these can provide little comfort for regulated utilities in the face of established procedures and the limited nature of the grounds for challenge, and potential remedies, available.

The discussion document focuses on three areas which regulated utilities companies will agree are ripe for reform:

  • Greater accountability;
  • Recognising and promoting good practice; and
  • Greater transparency.

The need for greater accountability

Regulators are generally under requirements to act proportionately, transparently, consistently and to focus resources where the need for intervention is greatest1. However, while the Regulators Compliance Code2 places great emphasis on regulators "helping and encouraging regulated entities to understand and meet regulatory requirements more easily" and "responding proportionately to regulatory breaches" the duty on regulators is only to have regard to the Code, and it is not applicable to "the exercise by the regulator or its staff of any specified regulatory function in individual cases" (paragraph 2.4).

As such, the Code does not amount to regulatory limits on the powers of regulators. There are also inconsistent procedures between regulators and differing powers of appeal, either to the High Court or to the Competition Commission, for example.

Recognising and Promoting Good Practice

Regulators have in the past been quick to criticise utilities companies, in circumstances where clearer policy statements might have enabled companies to meet the regulators' expectations. The discussion document proposes that there should be a system of "earned recognition" where regulators take account of business' efforts to comply with regulations "and adjust their enforcement plans accordingly". This raises some practical issues as to how efforts would be objectively measured, and the circumstances in which regulators would recognise that efforts made to meet licence conditions were more meaningful than actual licence compliance.

The need for transparency

The discussion document talks generally about the importance of improving the transparency of enforcement. Regulators are to be encouraged to sign up to a common sets of standards with input from trade associations, accreditation and professional bodies. There is also a stated intention to strengthen the Regulators Compliance Code, to provide for greater accountability for regulators and to identify underperformance by regulators.

There is currently very little evidence of moderation of regulatory responses as between regulated entities. This can be a particular source of frustration, where at the level of individual entities it is not possible to challenge on the basis of apparent inconsistent application of standards, but there exists nonetheless an inherent sense of unfairness which undermines basic principles of natural justice. Similarly, there is a case for greater transparency of communications between regulators, particularly where such communication may lead to policy changes and greater consistency of approach.

Suggestions for change

Suggestions to enhance transparency and accountability, together with consistency of approach across the utilities sector, would include the following (all would of course need to be the subject of cross-industry consultation prior to implementation):

  • Publication of consistent procedures for opening, conducting and reaching conclusions in relation to regulatory investigations;

  • Consistent approach to implementing procedures, and imposing sanctions;

  • Separation of the investigation team and regulatory decision-makers, and transparency of communications between the two;

  • Recognition of steps taken by regulated utilities to meet regulatory requirements;

  • Clear and standardised guidelines on how mitigating circumstances will be applied;

  • Standardised approaches to the setting of financial penalties;

  • Consistent appeal procedures which provide for a reconsideration of the merits of the case; and

  • Clear guidelines on communication with regulated entities during investigations and the opportunity to meet with the subject of an investigation at an early stage.

Conclusion

Poor regulatory enforcement processes can act as a disincentive to companies self-reporting problems and issues. It is clearly in everyone's interests to seek to create a robust enforcement environment in which regulated utilities can have confidence. The discussion document poses a series of questions and invites "full and frank reflections" while recognising that "businesses can be wary of voicing views directly to government, or of airing them with regulators". It suggests that trade associations and other business membership organisations may collate views to submit on behalf of their members. Eversheds intends to submit representations in response to the discussion document. Please let us know if you would like to review a copy of our representations.

We also have experience of acting for regulated utilities in disputes with regulators. Please contact us if you would like to discuss any of the issues raised above further.

1 Principles of Good Regulation specified in section 21(2) of the Legislative and Regulatory Reform Act - regulatory activities should be carried out in a way which is transparent, accountable, proportionate and consistent; and that regulatory activities should be targeted only at cases in which action is needed. There are various requirements on particular regulators – eg section 4AA of the Gas Act 1986; section 3A of the Electricity Act 1989, section 2(4) of the Water Industry Act 1991.

2 Made under section 23 of the Legislative and Regulatory Reform Act and published by what was then DBERR in December 2007. Referenced in the discussion document and available to download here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.




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