New regulatory fines will impact upon the risk profile of organisations

April 2016 | EXPERT BRIEFING | RISK MANAGEMENT

financierworldwide.com

The linking of fines to turnover is one of the most seismic changes to hit corporate offenders in a generation. The UK’s new Sentencing Council guidelines for Health and Safety, Corporate Manslaughter and Food Safety and Hygiene offences, which came into effect on 1 February 2016, will require reconsideration of where such matters sit within overall corporate risk.

What’s new?

These changes have gone largely unnoticed probably because the legislation has not changed, just the consequences of breach. In particular, any organisation that is awaiting a decision as to whether a prosecution may take place should alter its provision depending upon its turnover.

In general terms, penalties will be considerably higher than they have been in the past. For example, a health and safety offence which resulted in death under the previous guidelines, issued in 2010, recommended a starting point for a fine at £100,000. Now a medium size organisation with a turnover of between £10m and £50m could see the starting point as high as £1.6m depending on the level of culpability.

For Corporate Manslaughter offences, the previous guidelines indicated a fine starting point of £500,000. Now a medium size organisation would see a starting point of £3m with a possibility of fines up to £7.5m. A large organisation with a turnover of more the £50m faces potential fines of up to £20m.

Food safety and hygiene

Food safety and hygiene is included under the new, stricter sentencing regime with a high street retailer recently being fined £400,000 for mice infestation.

Very large organisations to be fined beyond the suggested range of fines

Very large organisations will face a situation where they are outside even the new guidelines, with judges being told that where turnover very greatly exceeds the £50m threshold for a large organisation, it may be necessary to move outside the suggested range of fines set out with a view to achieving a proportionate sentence. On a straight mathematical calculation that could mean the starting point for fines of between 8 percent of turnover (for a health & safety offence resulting in death with high culpability) and a range of between 5.2 percent and 20 percent of turnover dependant on whether there were aggravating or mitigating features that increased or reduced the final penalty from the starting point.

If charged with Corporate Manslaughter then the starting point would be 15 percent of turnover with a range of penalty between 9.75 percent and 40 percent dependant on the facts.

Due diligence

Due diligence has often, in the past, not been considered, for anything other than very serious incidents, to be material to financial worthiness. That view will need to change. Fines will be determined by a combination of harm, culpability and company turnover. Fining a company on the basis of its turnover, rather than its profitability, could have a disproportionate impact on companies whose profit margins are small.

Any organisation with a poor record of compliance and previous convictions will face penalties at the higher end of the range of fines. One resource that is likely to prove valuable to those assessing risk is the enforcement database accessible from the Health & Safety Executives’ website. It records all organisations that have been prosecuted or had any improvement or prohibition notice served upon them.

The government’s intention to clamp down on indiscretions in this space, pursuing both organisations and individuals, is laudable. However, aligning the fines to company turnover – as the new guidelines do – will be seen in some quarters as a rather blunt approach to take to the issue. After all, we’re talking about turnover here, not profitability.

Judicial approach

Judges are told that whilst the prospect of a company going out of business will be relevant to the level of fine they impose, in some cases it will be an acceptable consequence. The intention of these harsher penalties is to send an unequivocal message to management and stakeholders that failures will not be tolerated.

For those organisations that do find themselves in court regarding Health and safety failings, there is the sobering realisation that prosecutions in this space enjoyed a 96 percent success rate last year. The majority of the legal argument therefore will not focus on guilt and liability – but on placing the offence into the appropriate categories for both harm and culpability. The difference in the size of the fine from one category to the next could be significant.

For the first time these guidelines include penalties for individuals, often owners, directors or management. Between 1975 and 2009, just eleven people were imprisoned or given suspended sentences relating to Health and Safety breaches. Since 2009, when the legislation was introduced making the vast majority of offences imprisonable for the first time, 157 people have been sentenced to such a penalty, including 26 alone in the six month period up until October 2015.

There is no doubt that the government is doing a fine job of making it perfectly clear that this legislation is not something to be trifled with. The new regime represents a seismic change in terms of the financial penalties and there is no accounting provision for being able to put funds aside for the possible payment of future fines.

What next?

The best way to approach this topic is simply by reversing the recent trend, during the recession, of diminished investment in health and safety and food safety compliance. Any organisation that thought that paying the occasional fine was a better option than investing in prevention will need an urgent rethink.

Organisations failing to take these changes into account and failing to put adequate resources into managing the risks of non-compliance in these areas do so at their peril.

Ron Reid is a partner at Shoosmiths LLP. He can be contacted on +44 (0)3700 86 8471 or by email: ron.reid@shoosmiths.co.uk.

Ron Reid

Shoosmiths LLP