Following the Environment Secretary's announcement at the Conservative Party Conference this week that he will bring forward proposals for the Environment Agency (EA) to have the power to issue significantly higher civil penalties of up to £250 million to water companies that pollute the environment, BCL's Richard Reichman and Tom McNeill analyse the wider implications for this proposal.
The reporting on the announcement has generally focussed on the substantial figure - a maximum of £250 million. However, it is how these penalties will be imposed which is particularly significant.
The criminal courts can already impose a fine of £250 million (and higher) with the unlimited sentencing powers for environmental offences. For example, in a recent case the court imposed a fine of £90 million on a water company for sewage discharge offences. The proposal is significant because it would give the Environment Agency (i.e. the regulator itself) the power to directly fine water companies hundreds of millions, rather than needing to prosecute and the court determine the penalty. The EA's existing power to issue such fines (known as 'variable monetary penalties') is limited to £250,000 and so this would be a 1,000-fold increase from the existing maximum.
Why is the government pursuing this change?
Pictures of sewage discharges onto England's beaches and the associated public antipathy have featured heavily in the news cycle over recent months. Concerns have been raised regarding the conduct of water companies, the government and regulators. In addition, the prominence of ESG issues has meant that what is a longstanding issue has rapidly risen up the agenda.
The EA's 'Water and sewerage companies in England: environmental performance report 2021' released in July 2021 opened with the following stark comment: "In 2021, the environmental performance of England's 9 water and sewerage companies was the worst we have seen for years". The sector's performance on pollution was described as "shocking, much worse than previous years".
The EA described how it intended to change this behaviour. It placed the blame on company directors and stated that "over the years the public have seen water company executives and investors rewarded handsomely while the environment pays the price". The EA described its mission to "make it too painful for them to continue". In addition to calling for much higher fines, the EA would like to see "prison sentences for Chief Executives and Board members whose companies are responsible for the most serious incidents ... [and] company directors being struck off so they cannot simply delete illegal environmental damage from their CV and move on to their next role".
Against this background, it is unsurprising that the government is consulting on changes to the regulatory regime.
Why civil penalties?
The use of civil penalties is intended to make enforcement action quicker, simpler, and more cost-effective for the EA.
The announcement reflects a wider trend towards corporate offending being dealt without the need for a prosecution in the criminal courts. It comes just six months after the news that the Competition and Markets Authority (CMA) will be given game-changing new powers to fine businesses up to 10% of global turnover for consumer protection breaches.
The largest of England's nine water companies has an annual turnover of approximately £2.2 billion. A financial penalty of £250 million would be just over 10% of its turnover. The level of financial penalty proposed therefore appears to be comparable to the new CMA powers and Ofwat's power to impose civil penalties of up to 10% of turnover.
What will the impact be?
The detail in the consultation is currently awaited. For example, there is no information in the government's announcement regarding the impact on individuals. Variable monetary penalties can apply to individuals and, bearing in mind the EA's comments regarding holding senior officers to account, it would be surprising if this was not a feature of the forthcoming consultation. It is also unclear if the route of challenge to the EA's decisions will remain to the First-tier Tribunal of the General Regulatory Chamber.
With the EA and Ofwat conducting a major ongoing investigation into water companies which commenced in November 2021, we expect to see further significant penalties for environmental harm.
It is likely that the EA will continue to prosecute the most serious breaches (for example, those committed deliberately or recklessly and/or causing significant harm) in the criminal courts, particularly having expressed a desire to see prison sentences. The EA's current enforcement policy provides that variable monetary penalties are appropriate in circumstances such as where it is not in the public interest to prosecute. However, the ability to swiftly impose financial penalties in the hundreds of millions will be an important new power in environmental enforcement cases against water companies.
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