- Draft Order published which will grant Ofgem powers to investigate and enforce breaches of the European Regulation on wholesale Energy Markets Integrity and Transparency (REMIT).
- Ofgem issues Consultation on its proposed approach to exercising its new powers, including its new power to impose unlimited financial penalties for breaches of REMIT.
- Launch of Ofgem Call for Evidence on pricing benchmarks in gas and electricity markets.
On 6 June 2013 the Department of Energy and Climate Change (DECC) laid a draft Order (SI 2013/1389) before Parliament, which will grant Ofgem new powers to investigate and enforce breaches of REMIT. Subject to the Parliamentary process, the Order will come into force on 29 June 2013.
In addition, the Order will impose an obligation on market participants and persons professionally arranging transactions on wholesale energy markets (Regulated Persons) to take reasonable steps to ensure that records of telephone conversations and electronic communications relating to wholesale energy product transactions are kept. Electronic communications include email, faxes and instant message communications.
The powers granted to Ofgem under the Order constitute a significant augmentation of the role of Ofgem as an enforcement body in the wholesale energy market and are closely modelled on the powers available to the financial services regulators under the Financial Services and Markets Act 2000 (FSMA). They include powers:
- to require Regulated Persons, and others, to provide Ofgem with information to enable it to monitor compliance with REMIT and investigate suspected breaches;
- to levy unlimited financial penalties against, or publicly censure, those in breach of REMIT or the requirement to maintain records of relevant communications;
- to require restitutionary damages to be paid in respect of profits accrued from, or losses suffered as a result of, a failure to comply with a REMIT requirement;
- to apply for a warrant to enter premises; and
- to apply for non-cooperative individuals to be held in contempt.
As required under the Order, Ofgem has issued a Consultation on its proposed approach to exercising its new monitoring, investigatory and enforcement powers. Linked to the Consultation, and following recent controversy surrounding price reporting in the gas markets, Ofgem has also issued a Call for Evidence on pricing benchmarks in gas and electricity markets.
Interested parties should consider responding to the Consultation by 29 August 2013 and to the Call for Evidence, which closes on 31 July 2013.
2. Background to DECC's Order
REMIT, which came into force on 28 December 2011, seeks to create greater transparency in EU wholesale gas and energy markets (including over-the-counter markets), through registration and reporting requirements. It also creates a number of prohibitions and obligations relating to market abuse on such markets, with the aim of promoting market integrity.
REMIT requires Member States to provide their respective National Regulatory Authorities (eg, Ofgem in Great Britain) enhanced investigatory and enforcement powers for their new regulatory responsibilities by 29 June 2013. On 6 June 2013 DECC accordingly laid the Electricity and Gas (Market Integrity and Transparency) (Enforcement etc.) Regulations 2013 (the "Order"), which grants Ofgem with such powers and which, subject to the Parliamentary process, will come into force on 29 June 2013.
3. Ofgem's new powers to monitor compliance with REMIT
In order to assist Ofgem in monitoring compliance with REMIT, the Order will empower Ofgem to require Regulated Persons and their connected persons to provide it with specified information or documents, as well as information or documents of a specified description.
4. Record-keeping requirement
The Order requires Regulated Persons (the obligation is on the firm rather than on its employees) to take reasonable steps to ensure that:
- all telephone conversations made for the direct or indirect purpose of entering into transactions in wholesale energy products are recorded;
- a copy is kept of all electronic communications – Ofgem's proposed procedures refer to email, fax and instant messaging, but this would also include Bloomberg mail, video conferencing, SMS, business to business devices, instant chat and messaging through social media – made for the direct or indirect purpose of entering into transactions in wholesale energy products, and that all such records/copies are retained for at least 6 months (Ofgem may require retention for a longer period).
The record-keeping obligation is limited to the taking of reasonable steps, but will require many firms to implement new procedures in order to comply. Bearing in mind that recording of privately owned communication devices can give rise to significant potential data protection and privacy issues, it is worth noting that in the financial services context, reasonable steps taken by firms include at least some of the following:
- robust policies and procedures regarding the use of communication devices for the direct or indirect purpose of entering into transactions in wholesale energy products;
- providing training to staff on the obligations under the regime and the firm's obligations, and their own obligations under the firm's policies and procedures;
- banning the use of any mobile devices for any transaction-related purpose;
- requiring all conversations to be undertaken on the firm's land-lines which are automatically recorded;
- banning the use of private mobiles and social media for communications potentially relating to wholesale energy product transactions;
- restricting the use of firm-supplied mobile devices and recording them; and
- undertaking audits of orders to check that relevant communications have been captured.
5. Criteria for deciding whether to investigate suspected breaches
In its Consultation, Ofgem proposes that the legal test used to determine whether to proceed with an investigation is whether there are circumstances that suggest that a person:
- has failed to comply with a REMIT requirement;
- has failed to keep records of documents or copies of electronic communication relating to wholesale transactions; or
- is guilty of an offence relating to the provision of records and documents to Ofgem.
If this test is satisfied, before opening an investigation, Ofgem will consider whether the suspected breach is a priority matter and whether Ofgem is the best placed authority to take investigatory and enforcement action. Upon launching an investigation, Ofgem will notify the person under investigation (who may make representations) and publicise the investigation on its website, unless it believes that to do so would prejudice its ability to conduct the investigation.
6. Ofgem's new investigatory powers
Ofgem will have powers to investigate suspected breaches of the REMIT market abuse provisions or the obligation to maintain records of relevant communications. Ofgem will normally give notice of the initiation of a formal investigation to the person under investigation, but reserves the right not to do so if this might frustrate the investigation. It envisages that it would update that person on progress on a quarterly basis where appropriate. During an investigation, Ofgem may:
require any person to:
- provide information or documents;
- attend and answer questions;
- give all assistance as they are reasonably able to;
- require a Regulated Person, or its connected persons, to appoint, or to appoint directly, as skilled person to provide Ofgem with a report on any matter in respect of which Ofgem has the power to require information or documents; and
- require third parties who possess relevant documents to produce them to Ofgem.
Ofgem may also require such third parties to provide an explanation of a document, including where the third party is, or has been an adviser to the relevant person (although there are exceptions for documents protected by legal professional or legal advice privilege).
The Order will also enable Ofgem to apply to the court for the power to enter a premises under warrant (ie, a search warrant), which in some circumstances will enable Ofgem to carry out dawn raids at the premises of a Regulated Person. Unlike the Financial Conduct Authority, Ofgem will have the power to execute the search warrant without a constable being present, although the proposed procedural guidelines envisage that Ofgem may bring police constables or forensic imaging specialists to assist it when required.
The Order includes safeguards which prevent the use of evidence obtained under compulsive powers in criminal and civil penalty proceedings, and provide a statutory limitation on Ofgem's ability to require the provision of privileged material.
Ofgem will normally aim to complete the investigation within 9 months, or to provide an update. The investigation will either be completed, or, if Ofgem considers that there has been a breach, the person under investigation will normally be provided with a statement of case, and given 21 days for the making of representations. There is then an opportunity (but not an obligation) to make oral representations to the decision maker at an oral hearing – where a firm is under investigation, Ofgem would expect senior members of the firm's management team to attend any oral hearing.
Thereafter, in REMIT enforcement cases, Ofgem would make a decision as to whether the person being investigated had breached a REMIT requirement, and would either:
- begin the statutory enforcement process for the imposition of a financial penalty and/or restitution order or a statement of non-compliance; or
- make an application to the Court for a financial penalty, restitution order, cessation of unlawful practices and/or a temporary prohibition of professional activity.
7. New criminal offences created under the Order
Failure to comply with instructions issued by Ofgem under its monitoring or investigatory powers could result in a finding of contempt by the court, on an application by Ofgem. In addition, a criminal offence (potentially resulting in imprisonment and/or a fine) may be committed cases where a person has falsified, concealed or destroyed information requested by Ofgem or provided false or misleading information. The offences apply to body corporates, partnerships, unincorporated associations and, in certain circumstances where consent, connivance or neglect can be shown, individuals (including directors and executives) of such bodies.
8. The enforcement process
The Order makes provision for broadly the same statutory notice procedure as the financial services regulators use, namely the issue of a written:
- warning notice explaining the action which Ofgem proposes to take and giving reasons, setting out rights of access to material and specifying the time within which the person to whom the notice is given may make representations;
- decision notice giving Ofgem's reasons for the decision to take the action to which the notice relates, and giving details of the right to have the matter referred to the Tribunal;
and then either:
- a final notice, issued where either the matter was not referred to the Tribunal within the time required, or following the Tribunal's decision; or
- a notice of discontinuance, where no further action is to be taken.
The Order also makes provision for third party rights and for access to evidence. It also requires that enforcement decisions be taken either by a person not directly involved in establishing the evidence on which the decision is based, or by 2 or more persons who include a person not directly involved in establishing that evidence. Ofgem's proposed procedural guidance suggests decisions will be taken by the Enforcement Committee, currently consisting of two non-executives and an executive or authorised senior employee,
There is a right to refer the matter to the Upper Tribunal for an independent hearing. Those challenging an Ofgem penalty decision will have a full merits hearing. However, (reflecting recent amendments to FSMA) challenges to restitution decisions will only cover issues of fact, law and procedure (not matters of judgement).
Ofgem will be able to publish statements about warning notices, and to publish decision notices and final notices. It will consult the person to whom the warning notice was given before publishing information about it; Ofgem is not permitted to publish if publication would be unfair to the person against whom action is proposed, prejudicial to the interests of consumers, or detrimental to the stability of the wholesale energy markets in Great Britain.
9. Settlement procedure
Ofgem envisages that settlement could take place at any stage of the investigation and would likely result in a lower penalty than would be imposed by the Enforcement Committee. A Settlement Committee of the Authority will consider a recommendation for settlement made by the investigation team following without prejudice settlement negotiations.
10. Ofgem's powers to impose civil sanctions
In concluding that a person has committed REMIT market abuse or has breached the requirement to keep records of relevant communications, Ofgem may impose a financial penalty of such amount as it considers appropriate. Alternatively, it may publish a notice of censure. Where the commission of a market abuse offence has resulted in the breaching party accruing profits, or another person suffering a loss, Ofgem may require the breaching party to pay restitutionary damages.
The Order provides that both firms and individuals may be liable for offences committed with the consent or connivance of an officer; or attributable to any neglect on the officer’s part, and for a company to be vicariously liable for the acts and defaults of members who manage it.
Although the Order only implements a civil enforcement regime, the explanatory notes to the Order confirm that the UK government is also considering the possibility of a criminal sanctions regime.
11. Factors influencing the decision to impose financial penalties
Ofgem's ability to impose unlimited financial penalties for breaches of REMIT or the communications record-keeping requirement constitutes a significant increase to Ofgem's existing powers to impose financial penalties on gas and electricity licence holders up to amount equal to 10% of their global annual turnover.
When deciding whether a financial penalty is appropriate, Ofgem has indicated that it will listen to representations made by the breaching party. Ofgem has also indicated that it will consider the mitigating and aggravating factors set out in the table below.
Click here to view table.
The level of the penalty itself will be determined by the severity of the breach and the culpability of the people involved.
12. Additional orders and sanctions which a court may impose
In addition to the sanctions which Ofgem can directly apply, Ofgem may apply to the court for the following orders and sanctions:
- an injunction requiring a person to comply with a REMIT requirement or the relevant communications record-keeping requirement under the Order;
- an injunction requiring a person to take remedial action for breaches of the requirements above;
- a freezing injunction to prevent the disposal of assets by a person under investigation;
- a restitutionary order requiring payment to be made to Ofgem for distribution to the appropriate person(s); and
- an order requiring a financial penalty to be paid to Ofgem.
13. Protected disclosures in respect of breach of REMIT requirements
The Order confers statutory protection from breach of a restriction on the disclosure of information (however imposed) in respect of disclosures to Ofgem (or under a firm's established whistleblowing/reporting procedures) of information – which is obtained in the course of the discloser's trade, profession, business or employment – about suspected (or known) breaches of REMIT.