A High Court judgement in favour of Postcomm has confirmed that regulators do not have to base the level of fines they impose on pure empirical evidence but can legitimately make assumptions and estimates, provided that they are reasonable. This recent judgement will be of interest to all companies who could have a financial penalty imposed by their industry regulator and will be of note to regulators as they administer their own penalties policies.

Earlier this year, Royal Mail exercised its statutory right to challenge the £9.62m fine that Postcomm had imposed on it in respect of lost, damaged and stolen mail. Royal Mail's licence requires it to put adequate mail protection procedures in place. Following investigation, Postcomm determined that Royal Mail had breached that licence condition and a fine would be appropriate. Royal Mail's challenge was to the way in which Postcomm calculated the fine in relation to its own fining policy.

Postcomm was unable to quantify the gain that Royal Mail had made from its failure but was able to point to the £13.6m compensation that Royal Mail paid its customers in 2004/05 for loss, theft and damage of mail and could use that as one of the fixed points on which to base its calculation of penalty. That calculation involved making evaluations about the amount of mail that was lost, the average value of a lost item and what percentage of the lost items should be considered when imposing a fine. Royal Mail contended that Postcomm's own policy required it to look at the facts of the case and evaluations, assumptions and estimates could not be 'facts' of the case.

Essentially, the High Court held that it was reasonable for Postcomm to rely on the evaluations, assumptions and estimates that it did and it was therefore acting within the scope of its statutory fining powers. For future cases, the judgement confirms the following interesting points:

#  A regulator can not competently adopt a penalties policy which constrains the application of its governing statute – whilst penalties policies can not, themselves, widen a regulators powers, they should not seek to constrain them;

#  Both the gain made and loss caused by a licence condition breach (and similar regulatory misdemeanours) can be used in penalty calculations; and

#  The High Court could have imposed its own penalty had it overturned the disputed penalty. Such a High Court imposed penalty would not have had to be determined with reference to Postcomm's penalty policy.

This judgement relates to an area of the law that is common across many regulated industries, for example, Ofwat's current consultation on a proposed £8.5m fine on United Utilities is based on its penalties policy and will be subject to constraints and assumptions similar to those highlighted in this case.

Incidentally, the fine in dispute in this case is distinct from the £1m fine imposed on Royal Mail at the end of last year for breach of its licence obligation prohibiting it from securing an unfair commercial advantage.