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«Cost of Preferred (or more likely) Option Net cost to business per year Total Net Present Business Net Present In scope of OneMeasure qualifies as ...»

-- [ Page 1 ] --

Title: REMIT Criminal Sanctions Impact Assessment (IA)

Date: 24/06/2014

Stage: Consultation

IA No: DECC0164

Source of intervention: EU

Lead department or agency: DECC

Type of measure: Secondary legislation

Contact for enquiries: Arvin Jeboo/

Other departments or agencies: Ofgem, FCA

Ben Tirunawarkarisu

Summary: Intervention and Options

RPC Opinion: RPC Opinion Status

Cost of Preferred (or more likely) Option

Net cost to business

per year

Total Net Present Business Net Present In scope of OneMeasure qualifies as Value Value In, Two-Out?

(EANCB in 2009 prices)

-£1.3 m £0 m £0 m No N/A What is the problem under consideration? Why is government intervention necessary?

1. The Government said in the Annual Energy Statement that it wants to see strong sanctions against those who manipulate energy markets and that it intended to consult on criminal penalties, such as those already in place in financial markets, for such actions. The consultation will provide additional evidence in relation to the costs and benefits and test the rationale for a criminal sanctions regime.

2. Competition, transparency and market integrity are key drivers of good consumer outcomes. It is important that we have efficient wholesale energy markets that allow participants to compete fairly and without discrimination.

3. In addition to distorting the price of specific gas and power products and so causing loss to other market participants, market abuse – market manipulation and insider trading – can undermine confidence in the markets and undermine market participants’ willingness to trade, decreasing liquidity, distorting competition and increasing costs. It could also, ultimately lead to higher prices for domestic and business consumers and undermine the public’s confidence in the fairness of energy prices.

4. EU Regulation on wholesale market integrity and transparency (REMIT) introduces new prohibitions against market manipulation and insider dealing in energy markets and new requirements in relation to information provision. The Regulation gives Member States discretion as to whether to use civil sanctions, criminal sanctions or both. Other member states are taking a range of approaches to its implementation with some using civil law, others criminal and some creating both criminal and civil sanctions. Decisions are driven by each member state’s overall legal and regulatory framework.

5. The Government has already legislated to create a civil enforcement regime, but there are cases in which the threat of civil sanctions is not sufficient to deter offending behaviours. The availability of criminal sanctions will give consumers assurance that Ofgem is able to address any issues as they arise and will create an effective deterrent. Because of the importance of alignment with the UK financial services regime which has already criminal sanctions for market abuse the Government believes that the creation of the additional criminal sanctions for energy market abuse is necessary to comply fully with the requirements of REMIT.

What are the policy objectives and the intended effects?

1. The policy objective is to put in place a criminal sanctions regime for energy market manipulation and

insider trading in order to:

 have strong sanctions available to Ofgem for those who break market rules as soon as possible;

 address difference in treatment between financial markets (where criminal sanctions are already in place for these offences) and energy markets and remove any incentives to act improperly in energy markets compared to financial markets; and  ensure that there is a suitably dissuasive and proportionate regime for all types of improper conduct and market participant.

2. The objective is to create criminal sanctions as soon as possible in order to ensure Ofgem has effective, proportionate and dissuasive tools to deter wrong-doing and ensure that criminal sanctions are available in the event of offences being committed. The civil sanctions are not a sufficient deterrent against the full range of possible infractions; criminal sanctions are more dissuasive in a number of important cases.

3. Using regulations would address the gap in energy market regulation (compared to the financial market regulation of similar offences) in a timely manner. It would, however, enable a maximum prison sentence of only two years whereas the maximum sentence for similar financial sector offences is seven years. We are mindful of the continuing disparity that would be created by this lower maximum sanction so are proposing to keep the relationship between energy and financial markets under review as the regulatory regime around financial markets develops.

What policy options have been considered, including any alternatives to regulation? Please justify preferred option (further details in Evidence Base) Three options have been considered at this stage.

0. Do nothing (the base case option in which no new criminal sanctions would be made and breaches of REMIT prohibitions and requirements would continue to attract civil sanctions).

1. Limited new criminal offences for breaches of the central offences in REMIT Article 3 (insider dealing) and Article 5 (market manipulation). Such offences would be created through secondary legislation under s.2(2) of the European Communities Act. This means a maximum prison sentence of two years for these offences compared to seven years in the financial services sector.





2. New criminal offences in relation to all REMIT requirements and prohibitions – that is the prohibitions in Articles 3 and 5 and the requirements created by other REMIT articles, most notably those created by Article 8 (the provision of information to ACER) and Article 9 (registration with Ofgem).

Option 1 is the preferred option because:

 The limited approach focussing on the offences of insider dealing and market manipulation provides the best balance of strong and effective deterrence to market abuse with minimal burdens on market participants and meets the requirements of the EU REMIT regulation without gold-plating.

 Option 0 does not address the policy objective.

 Option 2 has a risk of higher costs without significant additional benefits.

Will the policy be reviewed? It will be reviewed. If applicable, set review date: 06 / 2018

–  –  –

I have read the Impact Assessment and I am satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impact of the leading options.

–  –  –

Description and scale of key monetised costs by ‘main affected groups’

1. The main affected groups are:

 Ofgem as energy market regulator  Energy market participants – in particular those with trading activities  Market participants investigated for potential breaches of REMIT

2. We do not expect criminal sanctions for offences of market manipulation and insider dealing to impose new burdens on market participants, because Ofgem would use information that is already required under the existing Civil Sanctions regime.

3. We expect costs for Ofgem of around £150,000 a year, for investigation and handling of suspicious cases depending on the number of criminal investigations undertaken.

4. We expect the cost to compliant business to be £0.

5. If criminal cases are prosecuted there would also be costs to defendants and to the criminal justice system through sentencing costs. There is a high threshold to cross before any prosecution.

Other key non-monetised costs by ‘main affected groups’ All identified costs have been monetised.

–  –  –

Description and scale of key monetised benefits by ‘main affected groups’ No benefits have been monetised, see below for non-monetised benefits.

Other key non-monetised benefits by main groups

1. Main benefit to wholesale energy market participants and consumers is the deterrence effect on market abusive behaviour meaning that fewer people will lose money to unfair trading.

2. Increased market confidence from the operation of a market free from improper practices is likely to have non-quantifiable competition benefits including increased participation, more liquidity and better price formation.

3. Government is expected to benefit from better alignment between energy market regulation and financial market regulations, reducing unnecessary regulatory burdens and costs.

Key assumptions/sensitivities/risks Discount rate (%) 3.5

1. Effective enforcement and that there will be no additional costs to compliant businesses.

2. Similarity to the legal process for financial market manipulation and insider trading.

3. Assumptions of costs to the regulator for enforcement and transition costs to a new regime, and costs assumed for court costs and sentencing costs assumed in the sensitivity analysis.

4. The discount rate used for future costs and benefits is 3.5%, the Her Majesty’s Treasury (HMT) Green Book social discount rate.

5. The policy impacts are appraised over 10 years in line with the HMT Green Book.

BUSINESS ASSESSMENT (Option 1)

–  –  –

Description and scale of key monetised costs by ‘main affected groups’

1. The main affected groups are:

 Ofgem as energy market regulator  Energy market participants – in particular those with trading activities  Market participants investigated for potential breaches of REMIT

2. We do not expect criminal sanctions for all prohibitions of REMIT to impose new burdens on market participants because Ofgem would use information that is already required under the existing civil sanctions regime.

3. We expect costs to Ofgem of £300,000 a year for investigation and handling of suspicious cases, depending on the number of criminal investigations undertaken.

4. If criminal cases and prosecutions occur there would also be costs to the criminal justice system through sentencing costs.

Other key non-monetised costs by ‘main affected groups’ All identified costs have been monetised.

–  –  –

Description and scale of key monetised benefits by ‘main affected groups’ No benefits have been monetised, see below for non-monetised benefits.

Other key non-monetised benefits by main groups

1. Main benefit to wholesale energy market participants is the deterrence effect on market abusive behaviour meaning that losses due to unfair trading are reduced.

2. Increased market confidence from the operation of a market free from improper practices is likely to have non-quantifiable competition benefits including increased participation, more liquidity and better price formation

3. Government is expected to benefit from resulting better alignment between energy market regulation and financial market regulations, reducing unnecessary regulatory burdens and costs.

–  –  –

1. The Government said in the Annual Energy Statement that it wants to see strong sanctions against those who manipulate energy markets and that it intended to consult on criminal penalties, such as those already in place in financial markets, for such actions. Although cases of market abuse are likely to be rare, their impact can be significant.

2. The EU Regulation on wholesale market integrity and transparency (REMIT) prohibits insider dealing and market manipulation (behaviours considered as “market abuse”) in wholesale energy markets and establishes a monitoring regime for wholesale energy trades. It came into force in December 2011.

3. The Government created a civil enforcement regime for energy market abuse in June 2013. Under the civil enforcement regime the UK energy market regulator, Ofgem, has the ability to require information; carry out inspections. Under the regime trades will be reported to ACER and that information will be available to Ofgem, and market participants will have to keep records and comply with investigations. Ofgem will be able to impose unlimited fines for insider dealing and market abuse and other breaches of REMIT. Under that regime the powers create a strong deterrent but do not enable Ofgem to bring criminal proceedings. The original costs for REMIT civil sanctions were considered in a separate regulatory triage assessment in April 2013.

4. The civil GB REMIT enforcement regulations came into force on 29 June 2013. The civil regime is not yet fully in place because implementing Articles 8 (Data reporting) and 9 (registration of market participants) of REMIT is dependent on the publication of Implementing Acts. The Commission intends to adopt the Implementing Acts by autumn 2014.

Objectives

5. The policy objective is to put in place a criminal sanctions regime for energy market manipulation

and insider trading in order to:

 have strong sanctions available to Ofgem for those who break market rules as soon as possible;

 address difference in treatment between financial markets (where criminal sanctions are already in place) and energy markets and remove any incentives to act improperly in energy markets compared to financial markets; and  ensure that there is a suitably dissuasive and proportionate regime for all types of improper conduct and market participant.

Rationale for government intervention

6. There are three key reasons for adding criminal offences to the GB REMIT civil enforcement arrangements for energy market manipulation and insider dealing.

The most serious breaches can lead to significant harm and therefore need strong sanctions.

7. The wholesale energy markets can be opaque as they are operated by numbers of highly skilled organisations and individuals using sometimes very technical financial instruments and agreements.

This coupled with the huge significance of energy for the economy and consumers and the very large sums of money involved, means that, though the risk of wrong-doing is small, its impact could be great.1



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