Atiyah Malik explains why ‘fee for fault’ is not a sensible solution to the HSE’s budgetary dilemmas.
Like many other public bodies, the HSE is looking for creative ways to maintain its services while being faced with savage funding cuts.
In last October’s Comprehensive Spending Review, George Osborne announced that government departments would shoulder, on average, a 19-per-cent cut in their budgets. In response to the review, the Department for Work and Pensions confirmed that the HSE would have to find minimum savings of 35 per cent in its dependence on public funds in the next four years, to 2014/2015. Because the HSE currently recovers one third of its costs from regulated bodies, the true level of cuts to its budget will stand at roughly 23 per cent, but that remains a drastic cut by anyone’s standards and will have a big impact on front-line services.
In a speech on 7 December last year, HSE chair Judith Hackitt confirmed that ministers had encouraged her to look at alternative sources of revenue to replace the lost government funding. This is unlikely to be in the form of administrative savings as the HSE has already taken action in this area, such as merging operations – i.e. moving its London HQ to a single operational site in Bootle – and closing down large offices, such as Manchester.
It has been revealed that the HSE is working on a proposal to “charge those who create risks”, which Hackitt referred to as a ‘fee-for-fault’ principle. The plan is to recoup all of the costs of an inspection or investigation where a serious, material breach in standards is found and a requirement to rectify is formally made, together with the cost of any follow-up work. It was categorised by Hackitt, in her recent address to the IOSH 2011 conference, as a deterrence for “companies that don’t properly manage the risk that they create”.
According to the HSE chair, this method of funding would be both “fair and equitable” and should be “welcomed by the vast majority of businesses who are compliant, and who see those who take short-cuts as getting away with an unfair commercial advantage”. However, there are several reasons to doubt that such a scheme would achieve its purpose and gain the approval of business and industry.
Conflicts of interest
The first problem is that making a regulator’s budget dependent on the discovery of faults could give rise to a conflict of interest among inspectors, where there may be a pressure to find fault if there was any internal link to bonus schemes, or targets. This ‘fee for fault’ approach would also inevitably change the relationship between inspectors and duty-holders, who may view each and every fee with scepticism and, primarily, as a money-making exercise.
This point was conceded by Hackitt as part of a panel discussion during the IOSH conference. While she was adamant that there was no intention to seek fees where fault did not necessarily exist, she could not discount the risk that inspectors might be encouraged to act in this way.
Safeguards
Ms Hackitt has admitted that there will need to be safeguards built in to the process to ensure that such a scheme is transparent and open to scrutiny. At the time of writing, there has been no indication on what those safeguards may be, or how they will be implemented, and it is questionable whether a truly safeguarded system can be implemented in what will become a challenging task.
The scheme could also give rise to considerable problems in how the HSE is perceived by business. This is especially the case in the current era, where the Government has been trying to improve the public perception of health and safety as evidenced by Lord Young’s report, Common sense, common safety, last year.
An organisation disputing whether it has “created a risk” is unlikely to be entirely convinced that the HSE is impartial when it is paying charges directly to the body that made that finding. The danger to the reputation of the Executive is that it will begin to be seen the same way as the public regards local-government parking enforcement agencies. That would be toxic for the HSE’s relationship with business, and for its public persona.
Costs
The second area of difficulty is in the level of fees charged by the HSE. Surprisingly little information is available justifying the regulator’s current rates. However, in June 2002 the HSE commissioned a report, available on its website, from the accountancy firm Deloitte & Touche, into the reasonableness of its charge-out rates under its permissioning regimes.
The report found that the HSE’s charges were substantially higher, across the board, than private-sector rates, and even other public-sector comparators, such as the Environment Agency and the Maritime and Coastguard Agency. Deloitte’s conclusion was that the HSE “needs to consider how best to achieve a significant reduction in its charge-out rates”, and drew attention to shortfalls in productivity and the lower ratio of technical staff to support staff, which contributed to the HSE’s higher costs.
Which industries will be charged under the ‘fee for fault’ principle is unclear. Those with comparable regulatory oversight to those regulated under permissioning regimes have been mentioned, but those are major-hazard industries – nuclear facilities, rail, and offshore energy – where a safety culture is an essential facet of business. For those industries, higher regulatory costs can easily be passed on to consumers.
However, if more internationally-competitive industries fall under the same charging regime, additional costs could threaten their ability to operate in the UK.
Criminal process
It will be interesting to see how the charging regime fits into the normal course of an HSE investigation, given that it could lead to a prosecution. While the issue of double jeopardy will not arise in respect of costs, as we can expect a court to reduce prosecution costs to reflect those already paid, there may be a change in the enforcement dynamic, with an increase on challenges against enforcement notices where it may be seen that a company accepts a breach if the ‘fee for fault’ is not challenged.
Sanction u-turn
This issue was raised in 2006, when the HSE agreed its position on adopting the alternative penalties to prosecution available under the Regulatory Enforcement and Sanctions Act 2008 (RESA). The HSE felt at the time that the health and safety regime adequately dealt with cases of non-compliance and that the extended tool kit offered was not required.
This issue was revisited by the Executive (and the then Health and Safety Commission) on five other occasions between 2007 and 2009, although it chose not to apply for the further sanctions under RESA, citing reasons such as the different nature of health and safety offences.
Second thoughts
The position today, however, is very different. Many organisations will feel that this change of approach by the HSE is led entirely from a financial motive and not designed to benefit duty-holders.
Of course, it may be that there is simply no better alternative to the ‘fee for fault’ charges that the HSE will be implementing, and no one wants to see a reduction in the UK’s admirable safety standards, or a concomitant rise in the number of industrial deaths. However, the methods by which standards are enforced can affect the relationship between inspectors and businesses, and, by extension, businesses’ attitude to health and safety. A growing perception that inspectors are ‘trigger happy’ could unravel much of the good work carried out in the last few years.
Consultation and implementation
The recently published HSE Delivery Plan – for the period 1 April 2011 to 31 March 2012 – sets out the “next stage of development for Great Britain’s health and safety regime”. The plan confirms the adjustments that the HSE will be making as a consequence of the reductions in government funding for the period to 2015. The consultation on sharing regulator’s costs with businesses where intervention is required will commence in July, with an intention to implement the new charging regime in April 2012.
It must be asked whether the combination of budgetary pressure, the threat of job losses, and the ability to raise revenue through finding fault in marginal cases would be in the interests of sound regulation. Whatever the views, the HSE will need to carefully consider the approach it takes to charging businesses and the system it establishes to implement this scheme.
Atiyah Malik is a safety, health and environment partner at Berrymans Lace Mawer LLP. She will be speaking in more detail on this subject at the SHP Legal Arena on Thursday, 19 May at 11.45am. For more details about Atiyah and the Arena sessions, go to http://content.yudu.com/A1rsin/SHPLegal2011Guide/
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That’s all very interesting. The call by accountants Deloitte & Touche is for a public sector organisation to charge low fees. I’m sure they charged HSE an unreasonable hourly rates for that work; as no doubt do Berryman Lace Mawer. Of course the equal and opposite conclusion is that the Environment Agency and Coastguard Agency have been considerably underselling themselves and need to put their charges up
But then there has always been one rule for the public and another for the private