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Ofgem’s proposals on protecting microbusinesses

Posted: 05/08/2020


Small businesses are not given the same protections as individual domestic consumers when engaging with energy suppliers and third party intermediaries (TPIs) acting on their behalf. This has been a source of concern and complaint for many business consumers and others. Ofgem is now consulting on new standard supply licence conditions (SLCs), with a deadline for responses of 23 October 2020. [1]

Much of the press and commentary related to Ofgem’s proposals has focussed on provisions dealing with energy brokers. However, it is important to note that the proposals go beyond simply expanding supplier liability to the actions of brokers acting on their behalf. Ofgem’s proposals will also require more from suppliers in key areas whether or not a broker is involved.

The problem: lack of energy regulation protection for small businesses and the particular issue of brokers

The present regime of SLCs gives additional protections to domestic consumers, enforceable by Ofgem, that do not arise (or are not so easily enforceable) under the general consumer protection law regime. However, with a few exceptions, such protections are not given to small business consumers, even though they may have little or no more capacity to engage with the complexities of the retail energy market with suppliers or TPIs. [2]

All consumers (domestic and non-domestic) are given less protection in their engagement with an energy sector TPI compared to their engagement with a licensed energy supplier. However, in the context of small business consumers, the role of unregulated energy brokers has been a particular cause of concern. While brokers can undoubtedly help smaller businesses to find better energy deals, they can also be the source of some questionable practices.

The Business Protection from Misleading Marketing Regulations 2008 (BPMMRs) prohibit business to business mis-selling and can be enforced by Ofgem. However, we are not aware of any instances in which Ofgem has enforced the BPMMRs. For an individual business, the BPMMRs do not really provide a remedy if it discovers it has been mis-sold to. The regulations specifically say that an agreement is not void or unenforceable only by reason of a breach of the BPMMRs.

Mis-selling by a broker to a business may give rise to a legal claim if the broker was acting as an agent on behalf of the business customer - for example, in finding and recommending the best deal - and if it failed in its duties. However, there are a range of different business models and we have seen many instances in which TPIs (including brokers) carefully avoid stating that they are acting on behalf of the business consumer (as opposed to an energy supplier, for example). Making a claim against a broker for breach of agency duties is not always easy and in practice it can be prohibitively costly, time-consuming and complex for a small business.

Who will Ofgem’s proposals affect?

Microbusinesses

Protection is being offered to microbusinesses that:

  • employ fewer than 10 employees (or their full time equivalent) and have an annual turnover or balance sheet no greater than €2 million; or
  • consume not more than 100,000 kWh of electricity per year, or consume not more than 293,000 kWh of gas per year.

As Ofgem points out, there are a large number of microbusinesses and they can be particularly vulnerable to mis-selling. The definition is well established – it comes ultimately from EU legislation and is already used in the standard supply licence conditions (SLCs). However, smaller SMEs and other non-domestic consumers, who may be too big to count as microbusinesses but perhaps no more sophisticated in their energy market engagement, will not be given the additional protections Ofgem is now proposing.

Domestic consumers are already given similar or greater protections to those now proposed for microbusinesses.

Suppliers

Ofgem is proposing regulation of suppliers in the form of amended and expanded SLCs with which they will need to comply. Suppliers will be liable to investigation and penalties from Ofgem in the event of non-compliance.

Ofgem does not presently have the powers to regulate brokers directly. Its powers to impose sector-specific requirements and to enforce them through regulatory investigations and penalties (rather than via the courts) is limited to suppliers (see our report referenced at footnote 2 for more on this). Ofgem’s proposals to deal with the acts and omissions of brokers therefore take the form of SLC obligations on suppliers (discussed in detail below).

Suppliers will need to take a very careful look at the arrangements they have in place with brokers, as well as thinking about their own compliance actions. They will need to be very careful to monitor broker activity and to act quickly on any concerns. Suppliers are likely to want to flow-through, as much as possible, the obligations discussed below where they relate to broker activity and this will require some careful contractual analysis.      

Brokers

The specifically defined term of “broker” will be introduced to the SLCs, so that obligations in relation to the activities of brokers (as defined) attach to energy suppliers.

“Broker” is defined as “an organisation or individual that, either on its own or through arrangements with other organisations or individuals, provides information and/or advice to a microbusiness customer about the licensee’s charges and/or other terms and conditions and whose payment for doing so is made or processed by the licensee”.

For SLC purposes, a broker might only be providing information - although it may also be a provider of advice - about the supplier’s tariffs and contracts but they must also be paid for this service by or via the supplier. This captures an arrangement where a broker’s fee is added to the charges the customer pays the supplier. A broker, as captured by the new provisions, will not be someone who is being paid directly by the microbusiness for their information or advice.

Hereafter we will use “broker” when referring specifically to the TPIs captured by Ofgem’s new proposals.

What is proposed?

In Ofgem’s own words, it is proposing:

  • Broker conduct principle: Introducing a principles-based requirement for suppliers to ensure brokers they work with conduct themselves appropriately.
  • Broker dispute resolution: Introducing a requirement for suppliers to only work with brokers signed up to an alternative dispute resolution scheme. 
  • Informed contract choices: Applying targeted sales and marketing rules to suppliers and brokers they work with. 
  • Broker commission transparency: Clarifying and expanding existing supply licence obligations to provide information about broker commission payments on contracts, bills and account statements.
  • Cooling-off period: Introducing a 14 day cooling-off period for microbusiness contracts. 
  • Contract extensions: Requiring suppliers to maintain existing contract rates for up to 30 days while a switch is being processed.
  • Banning notification requirements: Banning suppliers from requiring microbusinesses to provide notice of their intent to switch. 
  • Information: Ofgem also intends working collaboratively with leading consumer groups to improve awareness raising materials and information provision.

The final point does not involve new regulation – it is awareness-raising measures by the regulator. Looking at the specifics of the proposed amendments and additions to the SLCs – ie the actual new regulation proposed - Ofgem’s plans are as follows:

Broker conduct principle

This takes the form of an expansion of SLC 0A (the non-domestic Standards of Conduct), so that a supplier must ensure that brokers (as well as the supplier) achieve the Standards of Conduct in respect to broker designated activities.

A supplier will be responsible for ensuring that any broker acting on its behalf treats customers fairly, acts professionally, and communicates clearly and without misleading omissions etc in respect to billing and contract information.

Ofgem is proposing to give itself the power to add to the list of broker designated activities, simply by order. There is a defined list of designated activities which it can make broker designated activities and this covers existing SLC and areas for which suppliers are already liable. However, in theory at least, it appears to give Ofgem the potential for creeping increased regulation of suppliers in respect to broker activities, potentially over and above the obligations that apply to suppliers in respect to their own activities. For example, designated activities include any matters related to deemed contracts.

Dispute resolution

Suppliers will need to provide microbusiness consumers with information on how they can resolve disputes with brokers, including providing information on a Qualifying Dispute Settlement Scheme. Any broker that the supplier is using will need to be a member of such a scheme, which will offer out-of-court dispute resolution and could be an ombudsman scheme (SLC 20.5 to SLC 20.5B).

Contract information, informed choices and sales

Ofgem is proposing a new SLC (not yet numbered) which looks like a very close copy of the existing SLC 25 that applies to sales to domestic consumers.

A supplier will be required to ensure that its contracts and tariffs are clear and easily comprehensible. Records of any information provided during telesales or face-to-face sales (allowing for after-the-event checks on what microbusinesses are told during the sales process) will need to be kept for two years.

Suppliers must also ensure that they and any brokers they use do not mislead or use “inappropriate tactics, including high pressure sales techniques”. Suppliers and brokers must only recommend contracts that are appropriate to the particular microbusiness being sold to.

Principle terms and commission transparency

At SLC 7A.4 Ofgem is raising the bar as to what it requires of suppliers, as well as expanding supplier liability to the activities of brokers. The obligation on the supplier will no longer be to take “all reasonable steps” to make the microbusiness aware that it is entering into a legally binding contract and the principle terms. Instead, both the supplier and the broker must make the microbusiness aware of the legally binding contract and principle terms.

New SLC 7A.10C.1 and.2 will require the supplier to make the microbusiness customer aware of any commission or fees the broker is being paid in plain and intelligible language both verbally and on bills.

Cooling off

SLC 7A.13 will give the microbusiness the ability to terminate a contract within 14 days of entering into the contract or being notified of the principle terms, whichever is later, without reason or penalty.

Blocked switches and fixed rates

Ofgem is proposing that, if a supplier blocks a transfer, the microbusiness customer’s rate of charges cannot be increased until either 30 days have passed or, if earlier, the customer enters into a new contract (SLC 14.3A).

Termination

SLC 7A.11 to 7A13.B will mean that microbusiness consumers cannot be required to pay a termination fee or comply with a termination notice period if they are in the Initial Period (at the start of the contract), the Roll-Over-Period or on an Out of Contract contract (each of which has a defined meaning).

There are also limits on the supplier’s ability to extend a fixed-term contract, so that it cannot do so if the extension would be for more than a year; the customer has indicated that it does not want to extend; or if specified information about the contract has not been provided.

[1] See here.

[2] In March 2020 Citizens Advice looked at the differences in protection given to consumers engaging with the energy market via TPIs and directly through a licensed supplier. This was supported by an analysis by us of the legal and regulatory frameworks. Although primarily focused on domestic consumers, protections for microbusiness are also analysed. See here and here.


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