Sanctioning change: Macrory widens the regulatory toolbox

Howard Fidderman looks at potential changes to sanctions for health and safety breaches.

In November 2006, Professor Richard Macrory published his final report on improving the system of sanctions that are imposed on employers that break the law. The review looked at sanctions available to 60 national regulators, including the HSE, as well as local authorities and fire authorities. Chancellor of the Exchequer Gordon Brown has accepted all the recommendations¹, many of which could have an impact on health and safety at work. The HSE, however, appears relaxed with the recommendations, pointing out that their use is discretionary and without a timetable, and that the Better Regulation Executive must, in any case, first include enabling powers in a bill.

The government set the terms for the review in September 2005, in the wake of Philip Hampton's report on the enforcement of business-related legislation (Hampton and the regulators). Ministers asked Macrory, a professor of law, to establish general principles for the use of penalties in the enforcement of regulation and to look at issues such as effective deterrence, eliminating economic benefits of non-compliance, and the use of administrative penalties and alternative sanctions. Public consultation on his proposals (Sanctioning change) closed in August 2006 and has resulted in few significant changes.

REALISING HAMPTON

The Hampton review found that the penalties handed down by courts "are not seen as an adequate deterrent to regulatory non-compliance as the level of financial penalty can often fail to reflect the financial gain of non-compliance with regulatory obligations". Further, the range of enforcement tools is "limited, giving rise to disproportionate use of criminal sanctions, which can be a costly, time-consuming and slow process".

Hampton set out regulatory principles, one of which stated that: "The few businesses that persistently break regulations should be identified quickly and face proportionate and meaningful sanctions." The Macrory review aims to realise this principle by expanding the regulators' and courts' toolbox, making it more flexible, thereby "ensuring that a level playing field is created for all businesses because there is no financial gain from failing to comply. In such a risk-based system, most breaches will face penalties that are quicker and easier to apply, while there will be tougher penalties for rogue businesses which persistently break the rules." As a result, Macrory believes that compliance should improve.

The point of sanctions

While Macrory - like Hampton - believes that advice and incentives should play a "key role in ensuring regulatory compliance" and "normally be the first response of regulators", he stresses that "an effective sanction regime plays an equally vital role in a successful regulatory regime. It underpins the regulator's advisory functions, and its very existence will often act as an inducement to compliance without the need to invoke the formal sanctions." Sanctions for non-regulatory compliance, he concludes, can:

ensure that businesses that have saved costs by non-compliance do not gain an unfair advantage over compliant businesses;

Criminal sanctions and VMAPs would be available for the same offences: the standard for the former would continue to be "beyond reasonable doubt"; that for the latter would be the civil standard of a balance of probabilities.

There would be no maximum VMAP. Macrory "carefully considered" the issue, particularly a cap of 10% turnover, but concluded that it would "pose undue legal complexity" and could encourage regulators to set VMAPs "at inappropriately high levels".

A senior official within the regulator would decide whether or not to impose a VMAP, following a recommendation by field staff. This would allow consistent application.

The regulator would be allowed to recoup its costs, as in a criminal prosecution (otherwise they would have an incentive to use the criminal scheme) and pursue non-payment of a penalty through ordinary civil debt recovery procedures.

Appeals would be heard by a regulatory tribunal, which would either be a bespoke tribunal or part of the government's proposed First-tier Tribunal.

Employers should be "insulated from the risk of double jeopardy" of facing a VMAP and a private prosecution, although Macrory accepts that the right to the latter "as a matter of general policy … can be a valuable check on regulator behaviour". He ­recommends only that the government consider the issue when designing the scheme.

Opposition to MAPs

The use of MAPs has met with some opposition. The CBI, for example, fears they might become a "cost of doing business" for the deliberately non-compliant firm, and that inspectors will use them in similar fashion to parking tickets, thereby "fundamentally" changing the relationship between regulators and employers. The British Retail Consortium believes they will result in "tick-box inspections" that would lead to on-the-spot-fines for failures that are currently addressed with advice (or ignored). Rogue traders, the BRC argues, are more likely to be compliant with the threat of court action. Macrory, insists, however, that these fears do not outweigh the advantages and that his proposals, in any case, have sufficient built-in safeguards.

NON-FINANCIAL ALTERNATIVES

Fines and MAPs aside, there will be instances where a financial penalty is inappropriate because: it is insufficient; offenders may pass the cost on to shareholders, employees or customers; it may discriminate against smaller companies; it might not result in the best outcomes in terms of the harm caused; and it can lack a rehabilitation effect (within the business). Macrory therefore recommends four tools that are not instigated by courts: statutory notices, enforceable undertakings, undertakings plus and restorative justice.

Statutory notices

Statutory notices require a recipient to do, or refrain from doing, something, specifying steps to compliance and a timescale. Macrory's recommendation of their use should have little impact on health and safety, beyond the addition of remediation measures, where improvement and prohibition notices are already used. Although failure to comply is met with further sanction, Macrory recommends giving the regulator the option of using a MAP. Regulators should ensure they check on compliance, using a risk-adjusted basis with an element of randomised follow-up.

Macrory also recommends that the government consider whether appeals against all notices should be heard in the new regulatory tribunal rather than magistrates' courts (although appeals against health and safety notices are heard in employment tribunals).

Enforceable undertakings

Enforceable undertakings (EUs) are legally binding agreements between a regulator and an employer, under which the latter will carry out specific activities to rectify its non-compliance. EUs can include provisions for compensation, reimbursement or redress to affected parties. They may also require the offender to carry out a service to the community, such as funding or implementing a compliance education programme. EUs could also be combined with financial administrative sanctions as Undertakings Plus, which might be appropriate where there has been a clear financial gain from non-compliance.

The circumstances in which Macrory envisages the use of EUs are confused. At one stage, he advocates EUs where the regulator has the evidence to take a criminal prosecution or impose a MAP, but the business has "committed to address the issues surrounding the regulatory non-compliance through an EU". Elsewhere, he notes that regulators have limited sanctions for cases that are insufficiently serious to be prosecuted and too serious to receive just an informal warning, and proposes EUs for "instances where a non-financial intermediate sanction may be more suitable".

He then adds that EUs might be effective where a business can "absorb" a financial penalty or criminal conviction, with a limited impact on the culture or management of the firm. EUs, he argues, are likely to be more effective in securing a change in businesses' behaviour compared with other persuasive tools available to regulators. With warning letters and notices, the regulator sets out what needs to be done, and there is no business "buy-in". But businesses would have to apply for an EU, devise their own conditions and "take ownership of the regulatory solution presented".

Evidence from Australia indicates that EUs can offer a quicker and more cost-effective mechanism than court proceedings. Australian businesses said EUs were a "nice way" of warning and offering "another chance", and they encourage candour and promote compliance. Overall, Macrory believes EUs offer regulators flexibility and "represent a powerful alternative to traditional coercive, regulatory enforcement action, and have the potential of imposing fit-for-purpose sanctions which are more satisfying for both offender and the victims of non-compliance".

Restorative justice

Restorative justice (RJ), says Macrory, "is a process whereby those most directly affected by a wrongdoing come together to determine what needs to be done to repair the harm and prevent a reoccurrence". It is a philosophy that views harm and crime as violations of people and of relationships. Compared with the current system of retributive justice, it requires a "paradigm shift" in thinking about responses to harm. "It is justice that puts energy into the future, not into what is past. It focuses on what needs to be restored or repaid and what needs to be learned and strengthened in order for the harm not to reoccur."

Macrory is attracted to RJ because it offers good long-term outcomes for victims and offenders. Studies indicate that victims are more satisfied with RJ than with a court-based process and that the chances of reoffending are reduced. Potential uses include as a pre-court diversion, instead of a MAP, and within the criminal justice system as a pre- and post-sentencing option. RJ is, however, a sensitive area for offender and victim, and Macrory recommends that the government take a gradual approach to RJ with pilot projects.

Responses to the consultative document were encouraging, with three in four supporting the use of RJ. The HSC believes that, used in conjunction with other enforcement tools, RJ may provide "a good framework to match the breach proportionately, and involve and meet the needs of victims, for example rehabilitation, retraining workers, reassurance and support, closure and public support. "RJ would," adds the HSC, "enable an organisation to do the right thing quickly [and] … may well result in improvements in health and safety outcomes in businesses as well as educate the organisation and managers."

CRIMINAL COURTS

All the above recommendations have in common the notion that they avoid, at least in the first instance, a role for the criminal court. Macrory emphasises, however, that the use of criminal prosecutions remains "appropriate for serious breaches where there was evidence of intentional or reckless or repeated flouting of the law". Further, regulators should have discretion to institute criminal proceedings "where there is evidence of gross negligence and/or where the actual or potential consequences of the breach are so serious (such as a death or serious injury) that the public interest demands a criminal prosecution". In such cases, courts should be equipped to impose appropriate sanctions. He therefore recommends:

changes to improve the ability of courts to sentence criminal cases appropriately; and

offering courts five alternative and supplementary sanctions to fines.

Fit-for-purpose courts

In terms of the first group of changes, Macrory believes it would be "sensible" to consolidate certain types of regulatory non-compliance in a particular geographical area. For example, health and safety prosecutions for Greater London are currently initiated in the City of London Magistrates' Court. This could be extended so that particular magistrates courts handle different types of offences.

Macrory also recommends that:

the government invite the Sentencing Guidelines Council to produce guidelines for cases of regulatory non-compliance;

prosecutors ensure that magistrates are aware of the significance of the regulatory regime, the financial benefits of non-compliance and financial circumstances (although magistrates claim that some regulators are remiss, the HSE instructs its inspectors to do precisely this); and

regulators discuss training provision with the Judicial Studies Board, which is responsible for judicial training. Although Macrory rejects - on the grounds of time and resources - training all 28,000 magistrates in England and Wales in regulatory non-compliance, he believes that more systematic training should be available to district judges, prosecutors and justices' clerks (who advise magistrates), as well as to courts that hear particular types of offence.

Alternative sanctions

Courts will only be fit-for-purpose, however, once they are able to impose appropriate sanctions. While their powers remain restricted to fines for most regulatory breaches, this will not be the case. To this end, Macrory recommends the government consider introducing five alternative and supplementary types of sanction:profits orders; corporate rehabilitation orders; community projects; mandatory compliance audits; and publicity orders.

Profits orders

While fines should take into account any savings made by non-compliance, Macrory believes that in cases where savings are "clear" - for example, a failure to pay a licence fee - it would be preferable if criminal courts had the power to impose a profits order, which would be separate from a fine. Macrory believes this will help create a transparency and a level playing field.

The order would be a non-judgmental sanction restricted to the direct financial benefits of non-compliance as well as deferred costs, whereas the fine would represent the court's assessment of the gravity of the breach. For example, the fine might be small if the employer had been careless rather than reckless, but the profit order might be significant if the savings were large. The prosecution would apply for the order.

Corporate rehabilitation orders

Corporate rehabilitation orders (CROs) allow criminal courts to impose a sanction similar to enforceable undertakings. Following conviction, an offender can propose a plan of action to remedy the matter that caused the harm. Macrory suggests this could include a community project or compliance audit. The court can approve the plan or appoint its own experts to design a more robust plan. The regulator would monitor subsequent compliance; failure to comply would result in an alternative sentence. An order will often replace a fine, but Macrory suggests courts can use both together.

Community projects

Macrory is not prescriptive about CROs, suggesting they could include community improvement projects with a value that is related to that of the harm, for example funding and delivering an education campaign or a public park. Projects might be particularly appropriate where the offender does not have the ability to pay a large financial penalty. The task should be additional to anything the company is already legally obliged to do and the offender should not be allowed to use the project for public relations purposes. The experience of Australia, where community projects are used for health and safety offences, has been positive, with tangible benefits to the local community and greater engagement of the business.

Mandatory compliance audits

Also common in Australia - in state environmental regulation - the power to compel an organisation to undertake an audit is used to remedy deficiencies in business management. Macrory believes that these mandatory compliance audits may be appropriate where systematic organisational change would help achieve future compliance.

He envisages UK criminal courts ordering an audit, which must be carried out by an accredited third party. The audit would identify the changes that a business needs to make to protect the public and also to provide a framework to ensure the changes are made. The audit would be systematic, documented and objective and look at the employer's facilities, operations and products. A court could order an audit in addition to, or in place of, another sentence, and it could direct the regulator to monitor the compliance.

Publicity orders

Macrory believes that "reputational sanctions can have more of an impact than even the largest financial penalties" in motivating firms to change their behaviour. He suggests that courts could make a publicity order for a notice - with the wording agreed between the offender and the regulator - to appear in "an appropriate publication". This could be a local or national newspaper, a trade journal, or on radio or television. The wording would cover the background to the offence, the steps taken by the offender to avoid repetition, and remedial and compensatory measures.

"Publicity orders", claims Macrory, "can make a business's behaviour more public and really hold it to account": a company that loses its reputation "even for a short time can suffer significant damage to consumer confidence, market share and equity value". The CBI, for example, told Macrory that the HSE's "name and shame" database "puts peer pressure on those firms that have issues to address and threatens adverse impact on their reputation". The order would, however, differ from the HSE's database in that it would be imposed by a criminal court. It can be in addition to, or in place of, another sentence.

_{THE LIMITS OF DISCRETION}

As we noted at consultation stage, there is much to welcome in Macrory's report: the use of profit orders, higher and more appropriate fines and alternative sanctions all have the potential to increase health and safety compliance and contribute to a level playing field. There are, however, uncertainties as to how the recommendations will unravel in practice.

The Macrory report - and the preceding consultation document - applies to 60 regulators and, as such, gives few explicit indications as to what the recommendations might mean for individual regulators. Nevertheless, the HSE appears relaxed about the implications of the report, insisting that it will not impose significant changes on the HSE or on the "way it works" and that it "poses no threat" to the HSC's enforcement strategy" ⁴.

Given this, the HSE can "welcome" the set of penalties and the framework for their application: "The use of criminal prosecutions would remain appropriate for serious breaches where there was evidence of intentional or reckless flouting of the law, whether by an individual or a business. How current regulatory tools are used and applied would not be affected." Further, the HSE envisages that "there will be no compulsion on the [HSE] to adopt any new alternative penalty proposed. The intention is to allow the regulator to choose, if any, the best-fit alternative penalty tool(s) for [its] regime. Any alternative penalty would need to be in addition, and not an alternative, to existing powers."

The HSE has not indicated which alternative powers it might cherry pick, although there may be some clues in its own online consultation (HSB 345 p.16). While this revealed support for alternative penalties in principle, only administrative fines and adverse publicity orders attracted broad support when consultees were asked about specific alternatives.

Having it both ways

Still less certain is whether the HSE is safe in its complacency. Macrory wants to have it both ways: on the one hand, he talks about leaving regulators to make up their own minds about his recommendations; on the other, he claims that his recommendations "will bring a paradigm shift to the way in which regulatory sanctions are designed and used, making them more flexible and encouraging compliance". So while the HSE believes that it will be able to use existing criminal sanctions for offences that it currently prosecutes, Macrory argues that "most breaches [of all, not just health and safety, requirements] will face penalties that are quicker and easier to apply" and that MAPs will be used for a sizeable proportion of regulatory offences.

As we noted earlier, Macrory also argues that criminal prosecutions would continue to be appropriate for serious breaches. These would include those that were intentional, reckless or repeated. But he also would allow "discretion" in cases that involved gross negligence, injury or death. Then, to add to the confusion, he acknowledges that "it is reasonable to assume that [current prosecutions] are for the most serious offences and offenders."

And indeed, nearly all of the HSE's prosecutions follow serious compliance failures; most of them involve injuries. The HSE has more often been criticised over the years for failing to prosecute a sufficient number of incidents that have led to major injuries, rather than for over-prosecuting. If serious offences are to continue to be remedied appropriately - ie in the criminal courts - which "lesser" health and safety failures will attract administrative penalties other than those that are currently remedied with a quiet word in the employer's ear?

¹ "Regulatory justice: making sanctions effective. Final report", Richard Macrory, November 2006, www.cabinetoffice.gov.uk/regulation/reviewing_regulation/penalties/index.asp.

² Adjusted to exclude "exceptional" fines of £100,000 or more. Macrory attributes the average of £6,855 to magistrates only. In fact, it includes Crown Court fines - which are usually higher - making the situation worse than even Macrory describes.

³ www.brc.gov.uk/publications/principlesentry.asp.

⁴ "BRE - Macrory penalties review consultation document: regulatory justice - sanctioning in a post-Hampton world", HSC/06/30, www.hse.gov.uk/aboutus/hsc/meetings/2006index.htm.

Howard Fidderman is editor of HSB.

BOX 1: MACRORY'S TOOLBOX Criminal court sanctions Improve the effectiveness of criminal courts for cases of regulatory non-compliance. Introduce alternative sanctioning options for cases of regulatory non-compliance heard in the criminal courts, including profits orders, corporate rehabilitation orders, community projects, mandatory compliance audits and publicity orders. Regulators' sanctions Introduce fixed and variable monetary administrative penalties, with appeals heard through an independent regulatory tribunal. Strengthen and extend the system of statutory notices. Introduce enforceable undertakings and undertakings plus. Introduce pilot restorative justice projects.

BOX 2: PENALTIES, PRINCIPLES AND CHARACTERISTICS Macrory describes six penalties principles for sanctioning regimes. 1. Sanctions should change the behaviour of the offender. As such, they should not focus solely on punishment but should also ensure that the offender changes its behaviour and moves into compliance. This can involve changes in organisational culture or in the production or manufacturing process. 2. Sanctions should eliminate any financial gain or benefit from non-compliance. Employers may take a chance or even calculate that a sanction will still leave them benefiting from non-compliance. But if they know that "sanctions can be imposed that specifically target the financial benefits gained through non-compliance", then this can reduce the financial incentive for firms to engage in this type of behaviour. (Although there are practical difficulties in determining the profit, Macrory believes that this can be done.) 3. Sanctions should be responsive and consider what is appropriate for the offender and the regulatory issue. This "can include punishment and the public stigma that should be associated with a criminal conviction", but might also include a sanction that would bring the offender into compliance. The regulator should have discretion and take account of the offender's size and the needs of the victims and the public. "Ultimately, a regulator is obliged to uphold the public interest and maintain a credible enforcement and sanctioning regime." Punitive sanctions may be necessary for "repeat offenders who have been given previous opportunities - alongside advice and guidance - to comply, but have deliberately and intentionally failed to do so … [or] for a single contravention with very serious external consequences." 4. Sanctions should be proportionate to the nature of the offence and the harm, or potential harm, caused. They should reflect the circumstances of the firm and those surrounding the non-compliance. 5. Sanctions should restore the harm caused by regulatory non-compliance, where appropriate. This encompasses the needs of victims and ensuring that businesses take responsibility for their actions and its consequences. 6. Sanctions should deter future non-compliance, signalling to others that non-compliance will not be tolerated - "firms should never think that non-compliance will be ignored or that they will 'get away with it'." Penalty characteristics Macrory envisages that the regulators will establish a framework for the penalties principles to facilitate a consistent approach to sanctioning. The seven framework "characteristics" recommend regulators: 1. Publish an enforcement policy. 2. Measure outcomes, not just outputs. For example, the HSE would measure the effect of regulation (including the extent to which it remedied the harm or improved compliance) in addition to the numbers of prosecutions and enforcement notices. Macrory acknowledges "this may not be an easy exercise". 3. Justify their choice of enforcement actions each year to stakeholders, ministers and parliament. 4. Follow up their enforcement actions, particularly for "low-level" actions such as enforcement notices and warning letters. He does, however, recognise that this might be problematic with limited resources; one solution might be randomly selected follow-ups. 5. Enforce in a transparent manner, including providing information to the public on notices and sanctions. 6. Be transparent in the application and determination of administrative penalties, including mitigating and aggravating factors. 7. Avoid perverse incentives that might influence the choice of sanctioning response, notably linking inspectors' bonuses to enforcement action or regulators retaining the revenue from monetary administrative penalties.

BOX 3: VMAP AGGRAVATING AND MITIGATING FACTORS Aggravating factors The seriousness of the regulatory non-compliance, for example the harm or potential for harm to human health or the environment, and the duration of non-compliance. Evidence of any intention behind the regulatory non-compliance. The employer's disciplinary record or history of non-compliance Financial gain as a result of non-compliance with regulations. The employer's size and financial resources. The employer's conduct after the non-compliance has come to the attention of the regulator. Previous action taken by the regulator, or other regulators, to help the business into compliance. Mitigating factors Actions taken to eliminate or reduce the risk of damage resulting from non-compliance. Actions taken to repair the harm done. Cooperation with the regulator in responding to the non-compliance. Fast and accurate reporting of the non-compliance. The employer's size and financial resources. The employer's conduct after the non-compliance has come to the attention of the regulator. Vicarious liability for failures by employees, including the adequacy of management controls and the extent to which employees were acting outside of their authority.