The new Sentencing Guidelines represent the biggest shake up to the Regulatory landscape in recent years, with fines up to 10 times higher (or more in some cases), than their previous levels. With respect to individuals we are expecting to see cases of imprisonment of directors and managers in cases where that would have been unheard of before.
Tariff Based System
The guidelines seek to classify corporate entities by reference to turnover:
- "Micro" up to £2 million turnover.
- "Small" £2 million – £10 million.
- "Medium" £10 million – £50 million.
- "Large" more than £50 million.
- “Very large” see below.
The guidelines then calculate a fine level (with a range of potential sentences and an indicated starting point) based on a calculation taking into account turnover, risk of harm and culpability.
Importantly the guidelines do not require actual harm to have occurred (although it will aggravate sentences), only the risk of harm. Therefore previously innocuous risks could now lead to prosecutions where a risk of serious injury or even death is alleged by the prosecution.
Pre and Post Guidelines
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This is even more pressing when it is remembered that there were almost 700 convictions by the HSE alone in 2014, with no real sign of relent. When coupled with the fact that HSE have a 94% conviction rate, the incentive for investigation of dutyholders created by the Fee for Intervention system and the fact that prosecutions for both companies and individuals, particularly for serious incidents, are on the increase, this creates even more concern for businesses and senior managers.
Impact already here?
Although the guidelines are not in force until 1 February 2016 (as of today’s date, 28/01/2016), it appears that they are already influencing how judges approach sentencing. In the week commencing 25th January, a port operator and large gas distributor have been fined £1.8 million and £1 million respectively for offences not resulting in fatalities (broken arm and entrapment in a ruptured gas main).
Very large companies
For those companies regarded as “very large” (with turnover well in excess of £50 million, the guidelines include an example of a £900 million turnover company), the guidelines suggest that judges should not be restricted to move beyond the brackets provided, even exceeding the £10 million maximum for health and safety and £20 million maximum for corporate manslaughter breaches respectively.
This becomes more concerning for large businesses in light of a recent environmental prosecution in the Court of Appeal where the Court stated that (on the application of similarly structured new environmental guidelines) fines “up to 100%, of the company's pre-tax net profit for the year in question even if this results in fines in excess of £100 million” were not unthinkable.
The guidelines will lead to a number of significant challenges and changes in approach:
- Crisis Management strategies will need to be robust enough to maintain consumer, stakeholder and employee confidence and assist the organisation move back to business as usual.
- In the immediate aftermath of an incident decisions have to be made between defending the Company’s position whilst equally demonstrating a pro-active approach to improvement and co-operating with any investigation by prosecutors.
Scrutiny of Financial Information
- Increased reliance on financial reports, interpretation and presentation of financial data, increased interrogation and scrutiny of financial position of organisations being sentenced; evidence from FDs FCs or accountants in Court.
- Regulators requesting or even compelling production of this data as part of their investigation, which places further strain on their relationship with the business.
- Often companies may wish to obtain legal advice when setting accounting reserves against future contingencies as, unless this goes via a lawyer, it will not attract legal privilege and therefore sensitive information can be disclosed in open court that the court can then use to set a level of fine in a way adverse to the company’s interests.
- Greater focus upon issues of corporate governance and accountability at Board Level.
- There will be a continued need to ensure individuals are aware of their duties; both individually and as a key element of organisational compliance.
This will also likely necessitate a reappraisal of risk registers and consideration of the implications, such as:
- Level of reserve and financial planning – banking covenants, lending and credit worthiness, shareholder / investor / non-executive director scrutiny etc;
- Impact upon EL/PL Insurance and premiums: greater need to demonstrate risk management systems and work collaboratively with Insurer/Brokers.
- Companies will need to consider the viability of risk containment and this may involve hiving off risker areas of their business.