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Speaker
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Transcript
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Mike Barlow, partner, Burges Salmon
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Hello and welcome to Environment Matters, a fortnightly podcast by the Environment team at Burges Salmon. I'm Michael Barlow, a partner in the Environment team. Each month I'll be joined by members of the team to discuss key environmental developments and hot topics in UK environmental law. In today's podcast we'll be discussing the evolution of Variable Monetary Penalties, or VMPs as they're known. VMPs are a hot topic at the moment as the cap on the financial value of VMPs has just been lifted in England, meaning that for certain environmental offenses the Environment Agency will now have the option to impose civil penalties without limit. At the same time, offenses under the environmental permitting regime have been brought within the scope of VMPs for the first time. In this podcast we'll be exploring what these changes might mean for businesses and how they may be able to mitigate the associated risks. I'm delighted to be joined today by my colleagues Victoria Barnes who's a senior associate, hi Victoria.
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Victoria Barnes, senior associate, Burges Salmon
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Hi Mike.
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Mike
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And Pippy Shephard, a solicitor, hi Pippy.
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Pippy Shepherd, solicitor, Burges Salmon
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Hi Mike.
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Mike
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Thank you both for joining. So, like we usually do in these podcasts we like to start with getting our definitions right, so, Pippy first of all can you tell us what a VMP actually is?
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Pippy
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Yes, so VMPs or Variable Monetary Penalties are as the name suggests, financial penalties, traditionally up to a certain value, although this has just changed, which can be imposed by environmental regulators for particular environmental offenses. Would it be helpful to talk through the history of VMPs in the context of environmental regulation, Mike?
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Mike
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I think it would, I think particularly with these the history and the context is really important to understand.
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Pippy
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Okay, so VMPs are a form of civil sanction which in the context of environmental regulation are reserved for serious instances of environmental non-compliance, these were introduced through the Regulatory Enforcement and Sanctions Act 2008, or RESA, and the legislation was brought in following the Hampton review in March 2005 which was a review of regulation in general on reducing the regulatory burdens of business, and the Macrury Review in 2006 in November, which specifically focused on identifying the principles and characteristics of a successful sanctioning regime. So according to the Environment Agency, the purpose of a VMP is three-fold, to punish the offender, to deter future non-compliance and to effectively undo any financial benefit that they have or may have gained as a result of that breach and that could be either avoiding the cost of compliance or making a monetary gain from the offending act. So prior to RESA, regulators were generally limited to bringing criminal prosecutions against those who commit the most serious environmental offenses, although there were other enforcement tools such as warnings and formal cautions and those could be utilised for less serious offenses, but this inevitably required a vast amount of time and cost and resource in pursuing criminal investigations and prosecutions and this could be viewed really as a potential limitation to an extent on the effectiveness of the regulator's ability to deter non-compliance. So from the inception of civil sanctions under RESA which include VMPs, the intention has basically been to provide regulators with an alternative to prosecution which is less time and resource intensive than criminal proceedings, but which also doesn't compromise on deterrence.
And in addition to VMPs there are also alternative civil sanctions available to regulators which include fixed mandatary penalties, which are essentially what it says on the tin, stop notices so these are warnings to prevent the continuance of an activity, compliance and restoration notices so the former dictates actions to be taken to bring an offender back into compliance and the latter requires steps to be taken to restore the position as best as possible to what it would have been if there was no environmental offense and then there are also environmental enforcement undertakings which aren't strictly a sanction but are a set of proposals by an offender to take certain steps to put right an environmental breach and if those are accepted by the regulator and carried out to their satisfaction, that can prevent any further enforcement action being taken and I suppose the engagement of any of the sanctions by the regulator is dependent on factors such as the severity of the offense and the culpability of the offender but it's also important not to forget that where the Environment Agency is concerned anyway enforcement action taken has to comply with the body's enforcement and sanctions policy.
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Mike
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Thanks Pippy, as I said at the outset I think that background is really important to understanding these Variable Monetary Penalties and where they sit in the tools that are available to the Environment Agency.
And it's also important I think as you said to think about what Richard Macrury was doing when he looked at these civil sanctions and a couple of points that occur to me on that, one is that it was always intended to be about better regulation, that these weren't intended to be additional burdens for business ,and the second thing is really that he was looking to fill the gap between not taking any enforcement action and prosecuting where, what he called, was the client's compliance deficit sat, so they're intended to fill that gap and I think that's important to bear in mind as we come on to think about how these things are used in practice.
And then I think the other point to make is that although these VMPs have been around for many years in relation to certain offenses and we'll come on to that, they have very rarely been used and really that is the reason for these changes to the regime which are coming in and we'll explore further in this podcast.
So, Pippy mentioned then that VMPs can be imposed in relation to certain environmental offenses but as I've just said there have been changes to that regime. Victoria perhaps you can tell us a little bit more about those changes?
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Victoria
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Yes of course Mike. So you're right, VMPs and civil sanctions have been around for a while and under the original legislation which was the environmental civil sanctions order 2010 Variable Monetary Penalties could be used for a range of offenses under various pieces of environmental legislation such as, so to give you a few examples, the Salmon and Freshwater Fisheries Act, for offenses such as causing or knowingly putting poisonous matter into waters containing fish, or the Wildlife and Countryside Act for offenses impacting protected species, or the Water Resources Act for example for offenses around water resources like non-compliance with a drought order, so that's just to name but a few, but what VMPs were not available for and this is what a key change that has come about in the last few months, is they weren't available for offenses under the environmental permitting regime which is the core legal framework for the EA to enforce compliance with key regulations that govern industries that have the potential to pollute the environment, so such as the waste industry, the water sector, manufacturing, power generation, nuclear industries, so what this meant is that VMPs could not be imposed for the majority of the EA's investigations, which as you said Mike has sort of what has happened since 2010 and their introduction is they haven't really been used or utilised by the EA or only sparingly, this has now changed, the new regulations introduced in September and which came into force on the 1st of December not only remove the cap of a £250,000, but they now allow the EA to impose VMPs for offenses under the environmental permitting regime for a wide range of regulatory breaches thereby filling the deficit, the Justice gap, as it's been described in the consultation earlier this year, which I think is a fair statement since the availability of Variable Monetary Penalties in the EPR will enable regulators, the EA in particular, to respond to different levels of offending across all sectors in a more proportionate way.
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Mike
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Thanks Victoria.
So what these changes obviously mean now is that the Environment Agency has the ability to impose unlimited penalties on businesses and they could obviously be of a significant value and also for a broad range of offending, I mean it seems to me that that was always a gap, that these VMPs didn't apply to environmental permitting offenses but I know Richard Mcrury is very esteemed environmental barrister and he looked at this very carefully and because of the implications of this I know that he was very concerned that there were enough safeguards in relation to the operation of these civil sanctions and I do know from the legislation that the Environment Agency has to be satisfied to a criminal standard of proof, i.e. beyond reasonable doubt before imposing a VMP.
Are there any other safeguards, Pippy, written into the legislation that we should be aware of?
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Pippy
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Yes Mike, so there are some safeguards. There is a procedure which has to be followed, so firstly the regulator has to serve what's called a notice of intent on the suspected offender and this sets out the regulator's intentions, once that person's been served with a notice they then have 28 days within which to make representations to the regulator and actually if they're minded to in this timeframe they can also offer enforcement undertaking, so while there is an opportunity for businesses to dispute that proposed VMP, 28 days isn't a particularly long time especially considering potential technicalities and also the fact that any evidence the business might rely on to refute the Environment Agency's decision would need to be drawn up within that time frame. So then if the regulator does decide to impose a VMP it will issue a final notice and at this point it can allow for an early payment discount. The recipient of the final notice does then also have a right of appeal to the first tribunal if it can demonstrate that the decision to issue the notice was based on error of law, or fact, or that the decision itself was legally incorrect or unreasonable and it can also appeal the reasonableness of the value of the penalty itself, and can put forward other reasons as well which it considers that the final notice should have been or should be overturned or varied. But importantly unlike criminal investigations the suspected offender won't have the protection of the presumption of innocence and nor is it certain that the same level of disclosure which is required by the regulator and criminal proceedings will be afforded for VMPs. So whilst this step procedure and the opportunity to make representations does offer some safeguards, there is this objectively short interval between service of the notice of intent and the issuance of the final notice and this leaves key questions as to whether the process affords sufficient time to properly address and respond to any allegations raised and I've also not mentioned the interface with the Environment Agency's guidance in on VMPs which, at the date of this recording anyway, has not yet been published but this may dictate how an unlimited fine may be calculated, which is expected to supplement the already complex methodology of calculating VMPs by reference to the agency's enforcement and sanctions policy. So there is a nexus of considerations following the implementation of these changes, not least how the value of an uncapped VMP is now to be reached by the regulator.
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Mike
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Thanks, Pippy, that's really helpful to understand the process there, so Victoria just taking this forward then, the Environment Agency are going to be armed with this new power to issue these VMPs, do you think we're going to see more use of them now by the EA than there has been historically?
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Victoria
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Well not wanting to make a prediction and have it come back and bite me, I think we will almost certainly see the EA making use of these new powers and there's a number of reasons for that, the first being that logically the EA would not have been given these powers if there was no intention to use them, so now that it has this additional kind of weapon in its armoury and one that, at least on paper looks relatively easy to deploy in comparison to criminal proceedings, I think we're going to see them looking to use that as a key part of their enforcement responses to various offending. The second reason is these changes have clearly been driven by a degree of political pressure to take stronger enforcement action against polluters and I think the context of all of this is in relation to water companies and pollution of our waterways and and coastal areas and we've all seen the significant amount of media coverage in the past year in relation to water companies and water pollution, only this week yet another water company was featured on prime time television, but also there's been a lot of focused on alleged regulatory failures as well around pollution and that's sort of manifested itself in an investigation by the Office Environmental Protection which is looking into possible failures, regulated failures, by not only DEFRA, the Environment Agency, but also Ofwat in relation to the regulation of sewer overflows. So no doubt that with that context in mind the EA are going to be looking to utilise VMPs to kind of demonstrate that they're taking a tougher approach, they are taking action, and that's in line with the current trend of seeing increasing levels of fines against companies for pollution instances as well. And lastly I think there's also a clear desire to boost the coffers a little bit as well at the Environment Agency, for example the Government's plan for water set up a new water restoration fund which will use money from water company fines and penalties to support local groups and catchment projects to restore habitats and and waterways so no doubt the EA will want to utilise, come good on their promise, utilise VMPs as a way to shore up those funding mechanisms and that EA clearly sees VMPs as an effective way to do that. Whether that will play out in practice remains to be seen, but I think we're very likely to see them utilising these new powers, we'll see how effective they are in the in the coming years.
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Mike
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I think you mentioned the political pressure in relation to to these VMPs and I certainly think that the rhetoric around their introduction was very much, as you say, that they were going to be the answer to stop offending. Do you really see them as being the panacea that they've been presented to be?
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Victoria
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Well I'm sure the EA and DEFRA would like them to be and I'm not sure whether that will shine through in fact and because I don't think the situation is quite as simple as the narrative around it has portrayed, there's the idea that VMPs are this quick and easy route for the EA to not only enforce against those polluters but also potentially to bolster their water restoration fund because the VMPs, as Pippy led us through, there is a procedure to be followed and there is still this obligation to meet a criminal standard of proof which means really in reality the EA will have to continue to investigate any significant incident as if it's going to be a prosecution really because it'll need to make sure it's thorough and comprehensive and that will take time and resource. There's also implications associated with limiting a suspected offender's right to make representations to a mere 28 days, especially if we're talking about VMPs which are of a significant value, so if the Environment Agency doesn't follow its procedure correctly, or calculates a VMP inappropriate or not proportionately or within the confines of the sentencing guidelines, then it will expose itself to the appeal process and it's possible that a number of these significant VMPs proceed to the appeals process which will be time-consuming, that will cause a delay, any final notice imposing a VMP will be suspended until that appeal is concluded, and the appeals process will result in the EA incurring costs which they may not be able to recover. So, all of that demonstrates that it's not a simple case of just issuing final notices for VMPs and getting those penalties in, not in all cases anyway.
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Mike
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And just on that, I mean we do know don't we that the Environment Agency is going to be applying the sentencing council's guidelines for sentencing environmental offenses when calculating the VMPs and that's not an entirely straightforward process it seems to me, but also the change being that those guidelines were really intended for the court to hear both sides of the story and then come up with the figure, whereas the environment agency is effectively going to be doing that themselves.
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Vicoria
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Yes well exactly and they'll need to make sure in doing that that they're coming up with a reasonable and proportionate penalty, having considered aggravating and mitigating factors and certainly they may not always get that right and we've just actually had a very recent decision of the first tier tribunal in relation to a VMP which was the case of Scania Limited and the Environment Agency and that demonstrated that the Environment Agency's power to impose these VMPs is not infallible when it comes to setting the the level of fine, especially if it doesn't comply with its stepped approach to reaching the ultimate penalty that it wants to impose and in that case while it wasn't the first-tier tribunal's role to carry out an assessment from scratch so to speak, step stepping into the shoes of the agency, the first year tribunal was willing to get into the detail, to examine the assumptions made by the agency and question whether the conclusions reached were fair and sound, and ultimately the tribunal in that case found the penalty wasn't reasonable and substituted a lower figure.
So it's not as simple as saying the lid is lifted on the value of VMPs and now we can just find companies which breach environmental standards and that's the end of the matter, so there are safeguards the Environment Agency needs to get it right, needs to get its process right and needs to very carefully assess and evaluate what a proportionate penalty will be in each case. Yes, thanks. I think that Scania case is very interesting actually, it came out about a week before these changes came in and and did show that the first-tier tribunal would be prepared to intervene in relation to the level of fine, but obviously there were limited circumstances where that would happen, the key one being whether the Agency had followed its own processes.
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Mike
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Yes, thanks.
I think that Scania case is very interesting actually, it came out about a week before these changes came in and and did show that the first-tier tribunal would be prepared to intervene in relation to the level of fine, but obviously there were limited circumstances where that would happen, the key one being whether the Agency had followed its own processes.
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Victoria
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Yes, exactly.
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Mike
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So having gone through the background and how these things are going to work in practice, I think it's worth turning our mind now to just what should companies do to equip themselves, in case one of these VMPs lands on their desk, or is about to. Pippy, have you got any thoughts on that?
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Pippy
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Yes, I think, Mike, there's two parts to it. I think the key for businesses in the first instance is proactively prevent possible non-compliances, from a practical perspective this means undertaking appropriate risk assessments, conducting environmental audits and identifying those areas of concern which have got the potential to develop into environmental breaches, always having regard to the offenses for which a VMP can actually be imposed. Also facilitating adequate training and putting in place contingency and escalation procedures to essentially ensure that the risks of falling out of compliance with environmental regulations is mitigated so far as possible.
Obviously if then a business does find itself in a situation where there's been an alleged breach of the environmental permitting regulations, for example when a VMP is a likely avenue of enforcement, businesses will need to consider certain practical steps which can include engaging experts when necessary to provide technical expertise and if needed give advice with respect to the the actual offense, undertaking an evidence gathering exercise which you'd hope would be straightforward if those adequate procedures which I just mentioned are already in place, and then really just understanding the procedure involved in the issuance of VMPs and most importantly really the time scales which the businesses have got to respond in.
As we've said, there is this 28 day period and and that's not a huge amount of time given that there's that evidence gathering exercise which needs to be undertaken, and then I suppose also there is the active management of reputation and the risks associated with that. So far as within a business's control they will want to manage those risks but taking into account the fact that the Environment Agency does publish cases of imposed civil sanctions for environmental offenses and also being against this backdrop of heightened media publicity and public scrutiny over the water pollution investigations at the moment, clearly more than ever before it is crucial that that aspect doesn't get overlooked.
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Mike
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That's great, thanks Pippy.
So, I'm just going to finish with some concluding thoughts having digested all that we've been talking about. I mean it seems to me that whilst these aren't necessarily significant changes to the law itself, actually there is a real potential here for this to be a significant change in terms of enforcement of environmental offenses and the level, both in terms of number of enforcement actions and the likely penalties that may result from them, so this this could be potentially a bit of a sea change and the political pressure and potentially the push to drive up revenue that Victoria mentioned may well contribute to that. I think we've also heard that there is a potential for an increase in appeals against these penalties and that the Scania case is a good example of one of those, and that could be an increasing area there.
And I think there's also potentially a change to how the Environment Agency will consider enforcement undertakings, which are another civil sanction which is available to businesses to put forward, that's probably a whole other podcast in itself to go into that, but that may have an implication on those.
And I think there are some real challenges as well in terms of time scales and the ability of businesses to be able to react in the 28 days that they're given to respond to a notice of intent, and I think that businesses will need to to be ready and aware of these changes to be able to react in time. And then I think probably the last point to make is that, as we touched on, we're still waiting for at the time of recording this, for the Environment Agency's changes to its enforcement and sanctions policy, which is really going to set out how they're going to operate these things in practice, and until we have that I think we don't know exactly how they're going to operate, so we'll need to to keep a lookout for that and we will update accordingly.
So thank you both to Pippy and Victoria, that's been a really interesting discussion. Thank you so much for joining me.
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Pippy and Victoria
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Thanks Mike, been a pleasure.
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Mike
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Thank you for listening to Environment Matters.
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