Reports by the Comptroller and Auditor General - The Speaker's Committee on the Electoral Commission Contents


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 found65
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
Total141
Total Investigations0

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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Prepared 25 March 2013