Part Two
Compliance monitoring and enforcement
INTRODUCTION
30. The Commission is responsible for checking
statutory returns, donations and electoral registrations and for
monitoring compliance with the rules and requirements regarding
party and election finance. The Commission will investigate suspected
breaches of party and election finance rules, and has a range
of powers to assist with this function, including the right to
apply sanctions where individuals or parties have not complied
with their statutory obligations. During 2011-12, the Commission
conducted 219 initial assessments of allegations regarding possible
breaches of the law, and carried out 137 case reviews.[6]
No investigations were undertaken as a result.
31. The Hampton Review recommended that regulators
should ensure compliance with the rules through proportionate,
risk-based monitoring and effective enforcement activities. To
achieve this, regulators should use the principle of comprehensive
risk assessment to concentrate resources on the areas that need
them most. Where breaches of the rules are identified, those responsible
should face proportionate and meaningful sanctions, and the 2006
Macrory Report outlined a series of characteristics of a successful
sanctioning regime. This part of the report examines the work
the Commission has done to implement these principles of good
regulatory practice since our last report on this topic in 2009,
and looks at the impact of recent changes to the Commission's
powers and sanctions, which came into effect in December 2010.
A RISK-BASED APPROACH TO MONITORING
COMPLIANCE
32. Our last report on party and election finance
found that the Commission did not yet have a fully risk-based
strategy for enforcement and compliance as best regulatory practice
suggests. The Commission has worked hard to address this, and
has now adopted an approach which is very much in line with the
Hampton principles of ensuring compliance with the rules through
proportionate, risk-based monitoring. The Commission has been
fully transparent with those it regulates in developing the new
approach, and has published details of the policy online in its
document "Prioritising our Regulatory Activity".
33. Under this new approach, the Commission uses
risk profiling and analysis to tailor its approach to encouraging
compliance and to inform the way in which it audits the records
and processes of political parties and their accounting units,
focussing its work more heavily on parties with larger scale operations,
significant income, and past problems complying with the rules.
This has reduced some of the administrative burden that a "one-size-fits-all"
approach entailed and allowed the Commission to target its resources
more effectively at parties with a poor compliance history. All
political parties and accounting units with an annual turnover
of over £25,000 are assigned a score against three different
criteria:
a) Financial:
a score of A to C according to the level of income, levels of
debts or cash surplus, whether the party receives public finding,
or if it has submitted accounts in the past containing material
inaccuracies (A indicates a party with low levels of income, debt
and so on).
b) Compliance: a rank
of high, medium, or low based on the party's level of compliance
with their statutory obligations over the last three years.
c) Operational: a
score of one to five according to the scale of the party's operations,
for example whether the party has contested elections, whether
it holds elective office, or whether it has a relatively complex
operational structure with a number of separate accounting units
(a higher score indicates a party with a larger scale operation).
This should provide an indication of how significant the impact
of a failure to comply with the regulatory requirement might be.
34. The Commission maintains a more cautious
approach to the checks it does on whether donations to parties
are from a permissible source (parties and other regulated organisations
are only allowed to accept donations and loans worth over £500
from certain mainly UK-based sources, as defined by PPERA). Due
to the sensitive nature of this area of party and election finance,
the Commission has decided to continue checking all donations
rather than adopting a sampling approach informed by the risk
profiling of parties. Whilst this does reduce the organisation's
risk exposure in this politically sensitive area, it places an
administrative burden on the Commission at a time where resources
are limited. Given the quantity of information the Commission
holds on party compliance, a sample method approach would not
necessarily increase the Commission's risk exposure to unacceptable
levels. The Commission has considered a move towards a sample
based approach to the audit of permissible donations, but viewed
the benefits and risks of such an approach as being very evenly
balanced. For example, under such an approach, the Commission
would need to satisfy itself at regular intervals that the processes
set up by parties to ensure donations are permissible are sufficiently
robust.
35. The Commission is proactive in monitoring
election campaigns to identify parties or individuals who could
potentially be in breach of the regulations, and carries out this
work using the criteria set out in its policy on prioritising
its activities. The Commission also investigates accusations of
potential rule breaches brought to its attention by third parties.
Wherever possible, the Commission will first offer advice and
further guidance to encourage compliance, but if necessary will
take further enforcement action.
ENFORCEMENT ACTIVITIES
36. Where the Commission has determined through
its monitoring or through information received and subsequent
enquiries that a breach of the rules has taken place, the Commission
assesses what, if any, further enforcement activity is required,
including the potential use of sanctions where individuals or
parties have not complied with their statutory obligations. The
Commission has a detailed, legally binding, enforcement policy,
which is published online, and publishes additional information
on enforcement actions taken under its disclosure policy. This
enables the Commission to be fully transparent about its enforcement
activity in line with the characteristics of an effective sanctioning
regime identified in the Macrory report (Appendix A).
37. Both the Hampton and Macrory reviews emphasised
the importance of being able to apply proportionate and meaningful
sanctions to those individuals or entities who have deliberately
or persistently broken the law. Our last report in 2009 found
that the Commission had the power to sanction those who have not
complied with their statutory obligations, but it could apply
only a limited range of fines and referrals, and had little scope
for flexibility in the use of sanctions. Recognising this, the
Commission strengthened its investigative powers and obtained
a more proportionate and flexible range of sanctions through changes
to legislation which came into effect in December 2010.
38. This latest legislation enables the Commission's
enforcement activity to be significantly more in line with the
relevant principles of good regulatory practice identified in
the Hampton and Macrory reviews. Under the new regime, the Commission
has been granted additional investigatory powers to help it identify
breaches of regulation. The level of certainty required before
a sanction can be administered has increased in relation to some
types of non-compliance. However, the Commission is now able to
be more flexible in its application of sanctions, and has access
to a wider range of enforcement options, including fixed and variable
monetary penalties. The Commission can also issue compliance notices
requiring specific action to be undertaken rather than imposing
penalties, and these have been successful in some cases in encouraging
compliance.
39. Overall the introduction of the new powers
and sanctions has been a success. The increased flexibility and
variety of sanctions granted by the Act has allowed the Commission
to make its enforcement activities more meaningful and appropriate
for the circumstances of each case. The Commission's formal report
on the first year of the new powers found that the new powers
have enabled it to have more discretion in the actions it can
take and penalties imposed, making it a more effective and proportionate
regulator. Internal Audit recently reported on the enforcement
and sanctions process in place since December 2010 and found that
the Commission had robust controls in place when processing enforcement
cases and issuing sanctions.
40. The new powers and sanctions, together with
the risk-based approach to monitoring compliance, and increased
emphasis on improved advice and guidance as described in Part
1, have had a positive impact on compliance rates. The percentage
of parties that failed to submit loans and returns on time has
fallen from around five per cent in December 2010 to less than
one per cent in March 2012, with only three out of the 342 registered
parties failing to comply (Figure 1).
41. The Commission is seeing a trend of fewer
breaches of regulations. Between December 2010 and March 2012,
the Commission carried out 141 case reviews, of which 104 related
to late delivery or a failure to deliver reports to the Commission.
The Commission imposed sanctions in four of these cases (Table
2). The higher level of proof required, the reasonable excuse
provision[7], and need
to consider mitigating factors means that fewer cases warrant
sanctions. However, this is also a reflection of the success of
compliance notices and other actions to bring parties into compliance,
which are helping to improve behaviour without the need to impose
a further penalty.
Figure 1 Percentage of parties failing to submit
quarterly information on time
Table 2 Outcome of case reviews December 2010
to March 2012
| Outcome
| Number of Case Reviews |
| No offence found | 65 |
| Offence but no sanction imposed because of mitigating factors
| 57 |
| Offence but no sanction imposed as breach pre-dated new sanctions regime
| 6 |
| Sanctions imposed (or paid at initial notice stage)
| 4 |
| Cases on-going at 31 March 2012 (either at case review or sanction stage)
| 9 |
| Total | 141 |
| Total Investigations | 0 |
42. The Commission is also seeing a number of inactive political
parties choosing to deregister as a result of the new enforcement
approach and more proportionate sanctions available. These parties
often had a poor compliance history, but prior to December 2010
automatic fixed fines applied and it was not possible to tailor
the sanction to the circumstances of the party. This meant that
in some cases penalties may have been waived as they were considered
disproportionate to impose given the party's financial circumstances.
This is no longer the case under the new sanctioning regime, and
the register of political parties is now more up to date and relevant
as a result.
43. When starting to use the new sanctions the
Commission identified an anomaly with the wording of the revised
legislation, which means in some cases it can only fine the registered
treasurer of a party and not the party itself where information
is submitted late. This means that in some cases the available
sanction is not able to be applied effectively in line with the
enforcement policy. The enforcement policy reflects the Commission's
recognition that many individuals are volunteers and it may not
always be proportionate or cost effective to impose a sanction
on an individual in certain circumstances. The Commission has
raised this with Government and is seeking a change to the law.
44. The sanctions administered by the Commission
are civil sanctions that relate to criminal offences. To date
the Commission has not yet had to defend a sanction or fine in
court. The Commission intends to cover any cost associated with
such a challenge through its existing legal spend and contingency
funding arrangements.
45. The Commission has not yet needed to use
the new investigatory powers it acquired in December 2010 as it
has not been appropriate to do so. This is partly due to the nature
of the cases that have arisen, but is also a reflection of the
good levels of voluntary co-operation it now obtains from those
it regulates. The Commission is using its new supervisory powers
successfully, but has identified that it could make more use of
them to test the robustness of parties' controls and compliance
processes. This would help the Commission to improve the effectiveness
of its regulatory activities through more targeted and efficient
monitoring and audit work.
46. The Commission has a series of performance
indicators to measure the effectiveness of its enforcement activities
in achieving improved compliance. These include the number of
loans and donations reports and statements of accounts submitted
within the correct period, the number of cases investigated within
a certain time frame defined by their complexity, and the specific
impact of enforcement activity on parties in terms of their subsequent
compliance. The Commission also obtains feedback through a yearly
tracker, which includes sending questionnaires to the public to
gauge confidence in the Commission, and holds meetings with stakeholders
where further feedback is obtained.
6 The Commission has a 3 stage process for dealing
with potential breaches of PPERA:
Initial assessment: at this stage, the
Commission assesses whether there is a potential breach of legislation
and, if so, whether this warrants referral for a case review or
investigation.
Case review: where the initial assessment
suggests there may be a breach of legislation, the Commission
seeks to determine whether this is indeed the case. It will not
at this stage use its formal powers of investigation and will
not conduct interviews.
Investigation: the Commission will commence
an investigation where it needs to use statutory powers to obtain
information and/or where it wishes to interview individuals in
order to obtain information necessary to determine where there
has been a breach of legislation. Back
7
Under the new powers and sanctions regime, in order for the Commission
to be satisfied beyond reasonable doubt that certain offences
have occurred, it must first ascertain whether there is a reasonable
excuse for the non-compliance. Back
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