The In-House Lawyer

New civil powers, are – subject to debate in Parliament – now available for use by the Environment Agency (EA) and Natural England.¹ These powers were first conceived by Professor Richard Macrory in his final report, ‘Regulatory Justice: Making Sanctions Effective’ (Better Regulation Executive, Cabinet Office) (the Macrory Report), in November 2006, and were introduced under the Regulatory Enforcement and Sanctions Act (RESA) 2008 (which came into force on 1 October 2008).

The range of new civil powers will increase the options available to regulators and the sanctions will provide regulators with an alternative to criminal prosecutions for environmental offences. The new civil sanctions regime is designed to be more proportionate and reflect the fact that most offences committed by businesses are unintentional. We may well be witnessing the beginning of a new approach to UK regulation and not just in relation to environmental offences, although that is the present target. It is anticipated that businesses will welcome the elements of flexibility and negotiation opportunities with regulators, but there are other, more complex features that they will need to fully understand.

Background

RESA 2008 is the product of the government’s better regulation agenda and incorporates many of the recommendations from two important reviews of UK regulation. The first review is Philip Hampton’s ‘Reducing administrative burdens: effective inspection and enforcement’ (HM Treasury, March 2005) (the Hampton Review) and the second review is the Macrory Report. Macrory identified that:

• many regulatory sanctioning regimes were over-reliant on criminal prosecutions;
• they were not sufficiently flexible; and
• they were not always an effective deterrent.

Macrory also noted that regulators frequently took no action following a regulatory breach because they were limited to bringing a prosecution or doing nothing. Macrory called this the ‘compliance deficit’. His recommendation was that regulators should be provided with a flexible tool kit of civil sanctions that are easy to administer in instances where the nature of the offence does not warrant a full criminal prosecution.

Many of the key recommendations from the Hampton Review and the Macrory Report were implemented in RESA 2008, which is made up of four distinct, but linked, parts. The new tool kit of sanctions is contained within Part 3.

new civil sanctions

The four new civil sanctions are as follows.

Fixed monetary penalties (FMPs)

FMPs are designed to provide an alternative to prosecution in relation to low-level, minor breaches. They are analogous to fixed penalties for road traffic offences. Recently published (in January 2010) government guidance, ‘Civil sanctions for environmental offences: The Environmental Civil Sanctions Order & Regulations 2010’ (Guidance to regulators in England on how the civil sanctions should be applied, and draft guidance for Wales) (the Guidance) provides examples, including where there is a failure to meet requirements to monitor or document activities.

The Guidance also explains that FMPs are appropriate where advice and guidance has already been given, and has not been complied with. For those offences currently covered by the regime, companies will be fined £300.

Discretionary requirements

Discretionary requirements are designed for mid to high-level breaches and will include the following:

1. a compliance notice (CN);
2. a restoration notice (RN); and
3. c) a variable monetary penalty (VMP).

A CN is designed to target the breach and its causes. A written notice is issued by the regulator that requires a person to take specific steps to ensure that the offence does not continue or happen again. The Guidance gives examples of specific steps under a CN including:

• specific investment, such as building a concrete floor and bund to prevent leaks from tanks of chemicals entering the environment;
• a system of maintenance for critical equipment; and
• training of relevant staff.

An RN is a written notice issued by the regulator that requires a person to take steps to restore the position to what it would have been if no offence had been committed. These are specifically aimed at situations where environmental damage has occurred, whether it is temporary or a sustained loss of environmental quality (for example in air, water or soil quality). RNs will not be appropriate where action is taken under the Environmental Damage (Prevention and Remediation) Regulations 2009. Typical restoration actions might include:

• removal and/or treating contaminants to reduce impacts on natural resources or local communities;
• restocking or reintroductions of damaged species (eg fish); and
• developing and implementing strategic management plans.

An RN must clearly identify the damage or losses, the actions required to restore the position and the period within which those actions should be taken. The Guidance also states that the regulator may wish to specify the outcomes to be obtained and any monitoring requirements.

The last one of the discretionary requirements is the VMP. These are designed for the more serious cases where the regulator decides that prosecution is not in the public interest. VMPs are used to remove any financial benefit that may exist from a breach and to adequately deter future breaches. There is a three-step process to working out the appropriate penalty and this is considered in more detail on p9. These are capped at £250,000.

Stop notices (SNs)

SNs are designed to prevent a business continuing an activity until it has taken steps to become compliant and they therefore resemble injunctions. SNs can also be served in combination with steps leading to a criminal prosecution. An SN can only be served if a person is carrying on (or is likely to carry on) an activity that the regulator reasonably believes:

• is causing (or will cause) serious harm or presents (or will present) a significant risk of causing serious harm to human health or to the environment; or
• involves (or will involve) or is likely to involve (or will be likely to involve) committing an offence for which an SN is available.

Enforcement undertakings

In many ways the most novel of the new sanctions, enforcement undertakings are a voluntary agreement by a person to take steps that would make amends for a breach and its effects. The Guidance states that an enforcement undertaking will be appropriate where a proactive approach is taken, including measures that proportionately and appropriately address the breach and the issues it raises. Enforcement undertakings can also be offered, if sufficiently full and unreserved, as soon as the regulator signals their intention to impose a civil sanction. There needs to be a clear recognition of any failings or harm caused, and the regulator will usually look for director or board-level commitment to restoration and future compliance. The enforcement undertakings should set out the actions to be taken and the timetable should be agreed with the regulator. The enforcement undertakings will be a written agreement by the party to take action. A further discussion of the implications of enforcement undertakings is considered later in this article.

Scope of the new regime

The first regulators to have the new powers are the EA and Natural England. The new powers will only apply to certain environmental offences through secondary legislation.2 A selection of some of the key offences to be covered is set out in the table on p10. Significantly, section 85 (water pollution) offences of the Water Resources Act 1991 are not included. Neither are section 34 (waste duty of care) offences of the Environmental Protection Act (EPA) 1990. Additionally, not all civil sanctions apply to all of the offences included. For example, the only possible civil sanction for section 33 (waste) offences of EPA 1990 is an SN. Section 33 offences cover many low-level offences, as well as the more serious offences and yet for these more minor offences (such as minor technical breaches of environmental permits) the failure to apply civil sanctions other than SNs means that criminal sanctions will be the only sanction available. That being said, it is also worth noting that in due course, environmental permitting offences under the Environmental Permitting (England and Wales) Regulations 2010 will be included.

Some key features of the new regime

Calculation of VMPs

There has been much discussion about the subject of VMPs and specifically over the basis of their calculation.

The methodology is not straightforward. The regulator applies a three-step process to working out the penalty. First, an estimate of the financial benefit of the breach (normally the costs avoided, so for example, in a waste packaging prosecution this would be the amount of costs saved in failing to register). Secondly, by adding an appropriate deterrent component. Thirdly, by deducting any other costs incurred (ie the costs of any actions taken voluntarily in response to the offence).

The deterrent component requires the regulator to choose a starting sum (either by reference to the restoration costs, financial benefit (once again) or the maximum criminal fine that a Magistrates’ Court could impose). The Guidance allows the regulator to choose the starting sum according to which one they feel most ‘characterises the offence’. The Guidance states that this may be the highest one in practice. To make the deterrent component proportionate to the breach, the regulator will apply an adjustment based on aggravating and mitigating factors. Regulators will be able to obtain information to assist with their calculations and failure to comply with such requests may influence regulators to prosecute rather than serve a civil sanction.

It is very likely that there will be challenges to VMPs, certainly in the early years, based on the subjective elements in calculating the components. It must be remembered that there is often a risk that VMPs may result in a higher fine than criminal prosecutions.

Calculation of enforcement undertakings

While the concept of an enforcement undertaking provides a welcome degree of flexibility for those who have committed an offence and want to work with the regulator to remedy the problems caused by the breach, it should be appreciated that any failure to comply with the terms of an enforcement undertaking may result in a criminal prosecution. Enforcement undertakings will therefore have to be drafted very carefully to create certainty.

Process for issue

Before imposing a CN, RN or VMP, a regulator must serve a notice of intent containing specific information, including the grounds for imposing the sanction, and the right to make representations and objections. On receipt of the notice there is a right to make representations and objections within 28 days. At that stage the regulator must decide whether to impose the sanction (with or without modification) or, where they have the power, to impose a different sanction. There is no set time period for this response. If a decision is made to impose a CN, RN and/or a VMP, the regulator must serve a final notice.

There is a similiar process for FMPs, except that there is no option either to modify the amount or to replace it with an alternative sanction. There are reductions for early payments and penalties for late payments.

For SNs there is no requirement to serve a notice of intent, although there is the right to appeal directly to the tribunal within 28 days of receipt.

Appeals process

There is scope for all civil sanctions (including SNs) to be appealed to the General Regulatory Chamber of the First-Tier Tribunal under the new tribunal rules. The First-Tier Tribunal has the power to award costs against a party, but only where that party has acted unreasonably in bringing, defending or conducting the proceedings.

Any party to a case has a right to appeal a decision of the First-Tier Tribunal on a point of law arising from the Tribunal’s decision, providing that permission is granted by the First-Tier Tribunal or Upper Tribunal. Where permission is given the further appeal will be heard by the Upper Tribunal.

There has been much debate over the status of these new civil sanctions and whether they are truly civil or criminal. On the one hand they have some of the features of civil sanctions (they are designed as an alternative to criminal sanctions and they can be pursued through the civil courts as debts). On the other hand they have the punitive and deterrent features of a criminal penalty. The significance of this distinction relates to the protection that is given to defendants under the European Convention on Human Rights (ECHR). If they are to be classified as criminal sanctions then there is an argument that Article 6(2) of the ECHR is being breached in that the issuance of a notice of intention would seem to amount to a criminal charge and a sanction will follow unless the regulator is persuaded not to impose the penalty.

Although there is a right to appeal the decision, by that point the penalty would have already been imposed. In relation to the appeal mechanisms themselves, the burden is on the recipient of the sanction to prove a ground of appeal and that is contrary to the presumption of innocence under Article 6(2).

Some particular issues to think about

While FMPs only apply to minor offences, there is a real risk that companies will not fully consider the circumstances of a particular incident or alleged breach. Companies may choose to pay up (and take advantage of the reduction for early payments) to avoid further action. Although the fines themselves are minor, companies need to be aware of the implications. There may well be procurement issues further down the line. There is also the publicity angle to consider.

Regulators will be required to publish the details of any enforcement action taken using civil sanctions (which will include FMPs, enforcement undertakings and their terms) and regulators will be encouraged to set up a public register on their websites. Civil sanctions have the potential to lead to negative publicity and the loss of reputation. These are key issues for all businesses concerned about their image and public profile.

There is also a real risk that VMPs may result in higher fines than through criminal prosecutions.

Enforcement undertakings and their terms will need to be drafted very carefully, bearing in mind the potential implications if these are breached.

The timescales are tight and companies will need to have in place appropriate teams, both internally and externally, to deal with the sanctions as they come in.

conclusion

There are some new features to this regime and there will undoubtedly be a significant period of bedding down while regulators get to grips with how their new powers function. In short, companies need to understand the new regime and the implications of going down the civil sanctions route, as opposed to the criminal prosecution route. Finally, the adjacent table outlines the key features of each of the civil sanctions so that a proper comparison can be made.

By Simon Stuttaford, solicitor,Ross Fairley, partner andMichael Barlow, partner, Burges Salmon LLP.

E-mail: simon.stuttaford@burges-salmon.com;

ross.fairley@burges-salmon.com;

michael barlow@burges-salmon.com.