Regulating third-party intermediaries in the retail energy market: BEIS’ call for evidence

Introduction

On 16 August 2021, the Department for Business, Energy & Industrial Strategy (“BEIS”) published a call for evidence (the “Call for Evidence”) to increase its understanding of how third-party intermediaries (“TPIs”) operate in the energy retail market and whether there are any business models BEIS should consider for the operation of TPIs going forward.

TPIs sit between customers and regulated entities in the energy market (usually suppliers but also other entities such as system operators). While TPIs offer valuable services to the market, such as price comparison websites (“PCWs”) and brokers for business customers, there are concerns that if unchecked, the actions of some TPIs could lead to customer harm, particularly as TPIs operate outside the scope of the current retail energy market regulatory framework.

The Call for Evidence focusses on both domestic and business customers and the types of harm caused citing a lack of information transparency; contracting and sales arrangements; customer service arrangements; and out of court dispute resolution. The Call for Evidence also briefly covers risks to the energy systems and the potential regulatory regime.

In this article we consider the areas of potential harm for consumers arising from the operation of TPIs, the existing regulatory framework as well as the areas for potential regulatory reform.

Background

TPIs include various business models within the retail energy market providing customers with products and services linked to energy supply such as advice on energy procurement and switching. More than 1,000 TPIs currently operate in the market with around 49% of domestic customers using a PCW and 67% of small businesses using a broker. TPIs within scope of the Call for Evidence include:

• PCWs and auto-switching;
• bill-splitters;
• brokers; and
• load controllers i.e., companies controlling or impacting energy usage using communication networks.

Areas identified as presenting potential customer harm and emerging system risks

Lack of information transparency

BEIS has identified several market participants which lack transparency in certain areas, key examples being:

• PCWs / auto-switching
  • BEIS has focussed on PCWs and auto-switching as it is the most common method of customer engagement. Areas where PCWs and auto-switching may lack transparency include:
    • not fully disclosing all available suppliers;
    • how comparison results are ranked; and
    • whether commission payments from suppliers influence how tariffs are displayed e.g., in terms of ranking or prominence.
  • Ofgem does already operate an accreditation scheme for PCWs, “Ofgem’s Confidence Code”, however it is both voluntary and does not cover auto-switching services.
• Bill splitters
  • Bill splitters often offer unlimited energy plans where the cost is not determined by ongoing energy usage. It can be unclear to what extent customers are informed of their consumption usage making it harder for customers to compare their tariffs and switch as needed.
• Collective Switching
  • These schemes group large numbers of customers and invite suppliers to auction to obtain the most competitive offer. This can result in similar customer harm as PCWs, including hidden commission arrangements.
• Brokers
  • A minority of brokers are causing harm due to a lack of transparency around commission costs. Microbusinesses can lack a clear understanding of the commercial agreements that exist between brokers and suppliers and how this may influence a recommendation.

Contracting and sales arrangements

Specified harms in relation to the contracting and sales arrangements that BEIS is seeking views on include:

• Auto-switching services
  • A lack of transparency in the contractual arrangements and initial signing up / registration process, including whether consent is required to switch tariff or supplier.
  • Auto-switching may not inform the customer of the criteria used to evaluate and select a new supplier, what customer preferences will be taken into account, or what may change for the customer as a result of the switch.
• Bill-splitting services
  • Predominantly targeted at houses in multiple occupation, like student houses, these sites may not highlight that the customer remains jointly and severally liable and may be required to pay for other tenants.
  • Bill-splitters may also charge higher cancellation fees or require a longer notice period for cancellation than the supplier’s standard terms.
• Load controllers
  • Customers may not be given enough information to understand / compare offerings and some customers may be mis-sold or misled on potential revenues available from flexibility services.
  • Customers may not receive enough information about how their data is collected and managed, and their choices regarding data protection.
• Brokers
  • A minority of brokers engage in poor sales practices, including misrepresentation, mis-selling and non-disclosure of commissions. There are also suggestions of brokers falsifying documents like change of tenancy applications and Letters of Authority.

Customer service arrangements and wider customer protections

TPIs are an interface between consumers and the energy market and are increasingly the primary point of contract for customers. Quite commonly, consumers may expect to only interact with the TPI, and not realise the role of the supplier and the protections offered by the supplier in their supply arrangements.

For example, unlike for energy suppliers, there is no Supplier of Last Resort regime for a TPI failure which may result in negative outcomes for customers. Customers of the bill-splitting services may have little to no awareness of where the energy supply is sourced from or that they have a contractual relationship with the licensed supplier.

The Call for Evidence notes that identification of vulnerable customers is key – customers depending on electricity for medical support will need to be looked after by a load controller and may also require extra support to understand their product / service. It is unclear whether customers of bill-splitters are afforded the same protections as under the SLCs. Some splitters act as the licensed supplier’s agent – the bill-splitter must provide customers with the same protections. In contrast, some act as agent to the customer – it enters into a contract with the supplier on the customer’s behalf which may affect the supplier’s ability to discharge their obligations to the customer, who may be unaware that the bill-splitter does not provide the same protections.

Research also suggests that some brokers offer an inadequate level of customer service support with customers experiencing difficulty contacting their broker. This can incur additional costs for the business customer who needs time to resolve the problem and can create a negative experience.

Out-of-court dispute resolution

Licensed suppliers must have an effective complaints-handling procedure with this procedure prominently displayed on their website. Suppliers must also be members of a qualifying redress scheme, signpost customers if complaints cannot be resolved and provide access to Ombudsman Services. This does not apply to TPIs. TPIs can sign up to the Confidence Code, which requires accredited PCWs to have an effective complaints-handling procedure but does not mandate an ADR scheme. However, the Confidence Code is voluntary and does not apply to auto-switching or auto-recommendation services, leaving customers with limited options for redress. Similarly, for business customers, brokers are not required to have a complaints-handling procedure leading Ofgem to propose an SLC requiring suppliers to only work with brokers signed up to an ADR scheme.

Energy systems risks

As part of the energy transition, flexible energy services will become an important part of the system. Load controllers can remotely impact the electrical usage of multiple devices and aggregate flexibility. TPIs taking on this role include a range of organisations like aggregators, chargepoint operators and digital energy management system providers. Other new business models may be developed.

BEIS supports the development – as customer bases grow, organisations will be able to access an increased amount of connected devices and will be able to manipulate greater quantities of electrical load. The Call for Evidence notes that TPIs should have appropriate cyber security protections against cyber-attacks and products and services controlling large amounts of electrical load should minimise new risks and enable the operator and networks to mitigate these risks through enabling flexibility services.

Potential TPI regulatory arrangements

Features of any future TPI regulatory framework

The majority of schemes that currently regulate TPIs’ behaviour are voluntary with no obligation on TPIs to sign up. Market-wide coverage is unachievable, and protection cannot be guaranteed. A new regulatory framework has been suggested which should be:

• flexible;
• proportional to the harm or risk of harm;
• not a barrier to or distorting competition;
• seeking to achieve a coherent approach to regulation of TPIs;
• reflective of the variety of TPIs operating in the market; and
• enforceable and able to deter TPIs from contravening regulatory requirements.

An outcomes-based approach may be preferred to a prescriptive rules-based approach with co-ordination required to draw-up the framework as, for example, the CMA has recommended that PCWs fall under Ofcom’s regulatory remit. Regulatory coherence would likely include the government’s Smart Data work. BEIS will consult on any regulatory approach.

Comment and next steps

While this is an initial call for evidence, what is clear is that there is greater appetite to regulate the involvement of TPIs in the energy market given the increasing role TPIs are playing in the customer experience.

Consumer trust in the market is key to meeting net-zero as it will facilitate the take up of new and innovative approaches and help to achieve the customer outcomes and behaviour change required.

More immediately, responses are due to the Call for Evidence by 06 December 2021 at which point BEIS will consider next steps issuing further consultations as required, particularly with a view to features of any future TPI regulatory framework.

If you have any questions on the Call for Evidence, please get in touch with any of the authors of this article, or your usual CMS contact.