OGA publishes finalised Financial Penalty Guidance

United Kingdom

Having considered industry response to its consultation on the draft form, OGA has now published its final Financial Penalty Guidance and its Response to the issues that were raised during the consultation process on the draft Guidance. 

The Financial Penalty Guidance sets out the matters to which OGA will have regard when determining the level of financial penalty to be imposed by a financial penalty notice. Financial penalty notices are one of four sanctions which OGA can impose for a failure to comply with the MER UK Strategy; a term or condition of an offshore licence; and/or a requirement imposed by the Energy Act 2016 (the "Act"). Further detail on the procedure OGA proposes to follow in relation to enforcement decisions can be found within OGA’s Sanctions Procedure Guidance.

Financial Penalty Notices

Financial penalty notices are governed by sections 44, 45 and 46 of the Act. Such a notice will give details of the failure to comply with the specified petroleum-related requirement and will require, among other things, the person(s) to pay to OGA the amount of financial penalty specified in the notice. This amount cannot be greater than £1 million (although this cap can be increased by the Secretary of State). OGA intends the financial penalty to be: effective in addressing the underlying cause of the failure to comply; dissuasive of future failure to comply; and proportionate to the significance of the failure in the context of the petroleum-related requirement and the impact on the relevant person(s).

The Financial Penalty Guidance 

OGA's Financial Penalty Guidance (the "Guidance") sets out OGA’s approach to determining the level of financial penalty that it may impose. According to this Guidance, OGA may consider (amongst other things):

  • Any gain (financial or otherwise) made by the person(s) or any connected body as a consequence of the failure to comply;
  • The degree of harm caused, or increased cost incurred, by the failure to comply;

  • The severity of the failure to comply in the context of the relevant petroleum-related requirement, specifically a failure to comply with one of the three grounds set out above;

  • The extent to which the person(s) may have sought to benefit from the failure to comply; and

  • The duration of the contravention.

The Guidance also specifies categories of mitigating and aggravating circumstances and/or behaviours to which it may have regard in determining the amount of a financial penalty.  These include any action (or inaction) taken to address the failure to comply; previous conduct by the person with respect to the failure and other petroleum-related requirements; the presence (or absence) of internal mechanisms and processes intended to prevent the failure; and evidence of senior management involvement in supporting the failure to comply. 

The Financial Penalty Consultation

OGA was required by the Act to consult on its proposed Financial Penalty Guidance before it came into effect.  That consultation (available here) closed on 3 November 2016 and OGA has now responded to the issues raised by respondents to that consultation.

OGA has amended the Guidance to take account of a few of these responses. For instance, respondents suggested that there ought to be reference to the nature of the petroleum-related requirement in question, such that a distinction may be made between the breach of an “administrative” obligation and the breach of a more substantive obligation. OGA acknowledged this and amended their Guidance accordingly (at paragraph 21.1.3).

However, in most cases OGA has considered it unnecessary to amend the Guidance despite respondent concerns. For instance, concerns were raised that the levying of financial penalties may affect the confidence of investors in the UKCS and that criteria requiring consideration of this factor ought to be included in the Guidance. OGA disagreed, however, on the basis that “the new regulatory framework was designed to ensure that industry has confidence in the regulatory process”, and therefore “the level of financial penalty should not have an adverse impact on investor confidence”.

Some respondents noted that the current climate is such that OGA ought to be flexible, “as there are often good reasons why licence commitments do not get fulfilled”. In seeking to recognise this, OGA stated that “flexibility on licence commitments may, in certain circumstances, be consistent with the principal objective”. However, the regulator went on to note that if, having taken account of all relevant circumstances, it is nonetheless found there has been a failure to comply, these circumstances are no longer relevant to the determination of the appropriate level of financial penalty.

Clarity was also sought by respondents on how OGA might determine the base level of financial penalties which apply for particular breaches. However, on account of its lack of previous history in the imposition of financial penalty notices, OGA has deliberately chosen not to provide examples or produce example-based Guidance (in contrast to the example-based financial penalty guidelines of some other regulators, such as the Health and Safety Executive's Enforcement Management Model, or the Environment Agency's Enforcement and Sanctions Guidance).  OGA considers that doing so may subsequently constrain OGA’s ability to ensure actual penalties are effective, dissuasive and proportionate. In addition to declining to provide examples, OGA has also refused to specify the processes or mechanisms it would expect parties to have in place in order to prevent failures to comply. OGA believes it is up to each relevant person to consider the processes that are appropriate to enable their organisation to deliver their legal obligations.

As regards mitigating and aggravating circumstances, OGA will consider “evidence of broader conduct and behaviour of the persons” and will not be limited to considering the absence or presence of previous sanctioned breaches of petroleum-related requirements, underlining that any behaviour divergent from the obligations of the MER UK Strategy may itself be sanctioned in its own right.

Respondents also suggested that in considering the “degree of harm” OGA should specifically consider and differentiate between “direct and indirect harm” and take account only of a sanctioned party’s particular circumstances.  OGA disagrees.  Although the level of financial penalty will take account of the degree of harm on a “case by case basis”, the aim of the financial penalty is to be dissuasive: not merely to the fined party, but to all parties in similar circumstances. 

Next Steps

The Guidance must be laid before both Houses of Parliament before being implemented. OGA intends to publish a further statement at that time, confirming implementation. The Guidance will be kept under review by the regulator and will be revised as appropriate in the light of further experience and developing law and practice, along with any change to OGA’s power and responsibilities. Where any such revisions are proposed, OGA will again be required to consult appropriate persons and lay the proposed revised guidance before Parliament.