Consultation Response Strengthening the regulation of wholesale energy markets through new criminal offences Department of Energy and Climate Change Consultation The Law Society of Scotland s response October 2014
Introduction The Law Society of Scotland aims to lead and support a successful and respected Scottish legal profession. Not only do we act in the interests of our solicitor members but we also have a clear responsibility to work in the public interest. That is why we actively engage and seek to assist in the legislative and public policy decision making processes. To help us do this, we use our various Society committees which are made up of solicitors and non-solicitors and ensure we benefit from knowledge and expertise from both within and out with the solicitor profession. The Energy Law, Sub-committee welcomes the opportunity to consider and comment on Strengthening the regulation of wholesale energy markets through new criminal offences. The committee has the following comments to put forward: Comments Q1 - Do you know of any evidence about or examples of energy market manipulation or insider trading practices that should be taken into account in decisions about the proposed offences? The committee has no comment to make on this consultation question. Q2 - Do you think that the territorial reach of the regulators functions in respect of REMIT enforcement should be clarified? Yes, the committee agrees. The committee believes that, for clarity and confidence in the regulator s ability to impose criminal sanctions, clarification of offences with a territorial link to the UK is essential. Q3 - Do you agree that we should create criminal offences for the REMIT prohibitions on insider dealing and market manipulation? Yes, the committee agrees. The committee believes that prohibitions on insider dealing and market manipulation have the potential to cause enormous market problems. Firm Page 1
sanctions, and the willingness of the regulator to impose those sanctions, are a key part of improving confidence in the market. Q4 - Do you agree that the civil enforcement regime that is being created provides an effective deterrence to breaches of the REMIT requirements listed in the 2013 Regulations including those around registration and the provision of information? The committee agrees. the distinction between civil sanctions and criminal sanctions is an effective balance between public interest requirements and incentivising good corporate governance. Q5 - Do you agree that an offence of insider dealing in wholesale energy products should be framed in this way? The committee has no specific comments on how the proposed criminal offence is framed from a Scots law perspective. In particular, the proposed requirement for intent or recklessness is an important element of a sustainable regulatory offence in the context of insider dealing. Q6 - Do you consider that the exemptions set out above and in Chapter 4 are appropriate? The committee has no adverse comment on the proposed exemptions, and would simply comment that exemptions should always be proportionate having regard to the general purpose of the primary prohibition. Q7 - Do you agree that an offence of insider dealing should include legal persons and decision-makers? If the regulations are to be successful in incentivising behaviour, the committee believes that it would be appropriate for legal persons and decision makers to be included in the offence of insider dealing. Q8 - Do you agree that the offence of energy market manipulation should be framed in the way described here? Yes the committee agrees, given the safeguard that any prohibited activity must be conducted either intentionally or recklessly. Page 2
Q9 - Would the creation of these criminal sanctions change the processes that market participants are already putting in place to meet the requirements of the REMIT civil regime? The committee has no specific comment to make on this consultation question. Q10 - Would the creation of these criminal sanctions change the level of confidence that market participants have in the fairness of the wholesale energy market? Introducing criminal sanctions should serve to boost market confidence in the sector. However, the maximum penalty of 2 years imprisonment may be seen as favourable in comparison to equivalent offences in the financial markets sector. In any event, the effect on market confidence will depend to a large extent to the willingness of the Authority s willingness to use the sanctions available to it. To date, perception has been that the regulators have been reluctant to impose effective sanctions. Page 3
For further information and alternative formats, please contact: Brian Simpson Law Reform DD: 0131 476 8153 E: briansimpson@lawscot.org.uk The Law Society of Scotland Atria One, 144 Morrison Street Edinburgh EH3 8EX www.lawscot.org.uk Page 4