Almost a year ago I informed Parliament that my Department and the Treasury had just been notified about allegations of manipulation of the UK gas market. As I said at that time, I take these allegations extremely seriously. Market abuse is always wrong, and where it exists it must be identified and the full force of the law applied.
The specific allegations were that there had been manipulation of the gas market in Great Britain on 28 September 2012. These allegations concerned trading on that day in the period leading up to 4.30pm, when price reporting agencies produce a benchmark price for the day. Such benchmark prices are often used in a range of other contracts. It was alleged that gas was sold at a lower price than necessary, in order to manipulate downwards the benchmark price produced by price reporting agencies.
As is right and proper, these allegations were scrutinised by the independent regulators for the affected sectors. Ofgem has the lead responsibility for the physical energy markets, with the FCA leading on financial markets. The reviews entailed detailed analysis of relevant information in order to understand the market conditions and the trading positions of relevant market participants, including contracts priced by reference to price reporting agencies closing prices. Both reviews have now concluded.
Both regulators concluded that they could find no evidence in this instance of market manipulation, and Ofgem considers that the interests of energy consumers were therefore not harmed. They consider that the explanations provided by the sellers for the relevant trades are credible, and they have not found evidence which disputes the explanations provided. In light of this, they conclude that no further action is required in connection with these allegations.
Regardless of the outcome of these particular allegations I am fully committed to ensuring we have a transparent energy market where the risk of abuse is reduced. If any abuse does take place, it must be identified and robustly dealt with. The Government has a strong record of providing regulators with the powers they need to tackle market abuse, and we will continue to take further action where necessary.
We took a leading role in developing the EU regulation on wholesale energy market integrity and transparency – known as REMIT. REMIT prohibits insider trading and market manipulation in wholesale energy markets across the EU and has been in force since 28 December 2011. The UK was one of the first countries to implement REMIT in full, when we put in place civil powers to allow the regulator to tackle manipulation of the energy markets, in June 2013. In view of the importance of the energy markets set out in the Annual Energy Statement I now plan to consult on the introduction of criminal sanctions for energy market manipulation activities.
Ofgem continues to monitor wholesale energy markets, and has an established whistleblower policy to encourage people to bring any examples of market abuse to its attention. REMIT already requires those organising transactions in wholesale markets to report suspicious trades to Ofgem. Ofgem is also working with European colleagues to further develop our cross-border REMIT market monitoring systems.
The allegations in this case were that prices used by Price Reporting Agencies were manipulated. We need confidence that there is a rigorous price assessment process, providing a fair assessment of the market. Ofgem therefore ran a call for evidence on benchmarks in gas and electricity sectors on: potential risks; whether the current processes are fit for purpose; and whether further action is necessary. Ofgem is currently analysing the responses received. It will be for Ofgem to set out their approach, but if action is warranted their responses could range from facilitating effective self-regulation by PRAs, to more significant regulatory interventions. Whatever approach is adopted must take account of international initiatives in this area. PRAs are already implementing Principles for oil benchmarks developed by the International Organization of Securities Commissions (IOSCO) at the G20’s request. We are working within the EU to ensure that any new regulation of PRAs under their proposed Benchmarks Regulation enhances the robustness of energy benchmarks.
Transparency in the energy market is another important element of our overall approach to deterring market abuse. That is why I have asked Ofgem to carry out a detailed assessment of energy suppliers’ financial reporting practices and set out the necessary steps to improve transparency. This assessment will be delivered by Spring 2014. In addition, the Prime Minister has announced that Ofgem, OFT and the new Competition Markets Authority will lead a new annual review into the state of the competition of the market.
Ofgem and FCA work independently of Government to ensure that regulations are not being breached. In this case, they have concluded that they could find no evidence of manipulation and Ofgem considers the interests of consumers have therefore not been harmed. But it is right and proper that they continue to be vigilant and we will continue to support them by ensuring the right regulatory framework is in place and that there are appropriate deterrents.