Friday, 30 May 2008

on regulatory fines

We've heard it before, regulators fine companies, companies pay up and the government soaks up the money. Or does it? This money either ends up as a bonus for Treasury bigwigs, or more likely it ends up back with the company. Through subsidies. What happens to fines imposed by regulators and is it time for the way these fines are imposed to be reformed?

Some of the large fines in the last few years include:

Royal Mail fined £7.5m in September 2003 by Postcomm and again £11.4m in 2006. Fines are directly paid to the Treasury (page 9 note 14) into the Consolidated Fund, i.e. the Governments bank account, who among other things subsidise some Royal Mail activity.

Thames Water fined £12m in 2007 by Ofwat. The money from Ofwat's fines also go to the Treasury.

Network Rail fined £14m in 2008 by the Office of Rail Regulation. The rail industry is a heavily subsidised industry. As The Times reports,

Britain’s rail network will consume more than £5 billion in subsidy this year, more than three times what British Rail received. Public funding was supposed to be phased out under privatisation but has risen sharply in the past ten years, despite a doubling in the total amount paid in fares by passengers over the same period.

ITV fined £5.68m in 2008 by Ofcom, for phone in scandals. The BBC was also fined for a similar scandal, and as this article points out. We pay for the BBC, so we are effectively being fined.

In all of these cases the money from fines appears to head to the Treasury due to the way these regulators are legally set up. In the 24th report of the Select Committee of Public Accounts, Section 31 stated,

31. If a company's performance is well below expected standards of service, Ofwat has the power to fine the company a maximum of 10% of its turnover. But any fines imposed would go to the Treasury and not benefit the consumer. This means that consumers are not compensated for poor company performance. Furthermore, during a hosepipe ban, consumers do not receive compensation for the lower level of service they have endured.

The Royal Mail example above also provides a case of money heading to the Treasury, in that report the Select Committee on Public Accounts pointed out that,

14. Fines, on the other hand, are direct, but are paid to the Treasury rather than consumers.

There is an entire government department tasked with looking at the issue of regulatory reform. The Department of Business, Enterprise and Regulatory Reform would clearly have any reforms to fines as part of their remit. It seems to focus on cutting down red tape and as with most government websites, theirs lacked clarity on purpose. The one study I could find, Regulatory Justice: Making Sanctions Effective, focused far too heavily on non-public companies and how these should be regulated.

Instead of fines being paid by companies which end up in government coffers, why not have fines becoming an extra variable in a regulators price capping plan, thus passing on the effect of a fine to the consumer through lower prices (granted for only a short period of time).

Fines could also be earmarked for investment only purposes, however this could have been what the money was scheduled to be spent on any way. Rather than imposing a penalty on the company it would simply be guaranteeing earmarked investment.

Non-financial penalties could of course be used, and the aforementioned Regulatory Justice paper alluded to this.

Hopefully the issue will be looked at in detail at a future date, possibly being the topic of debate at a fringe meeting at the Liberal Democrat autumn party conference or being studied by BERR. Until then fines will remain as a stealth tax, being imposed on companies, but being paid by consumers.

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