OFGem’s new rules for brokers

OfGem launched a strategic review of the microbusiness retail market on May 3rd 2021. This review was prompted by concerns over the complexity and difficulty of accessing price information, which could harm small business owners trying to find a good deal.

Ofgem has a great deal of experience with the hardships faced by microbusiness owners. They know that an unlucky few may use their knowledge to prey on others in this unregulated industry, and because they care so much about these people’s welfare, Ofgem developed guidelines for all stages of customer interaction as well as sharp practices which should be avoided at every turn.

The first changes micro-businesses are expected to see is scheduled for Autumn of 2021 following the final review in early June of the same year. OfGem’s “finalised package of measures” means that suppliers will need to be more engaged with microbusinesses. This is a great opportunity for both parties: Suppliers can access an untapped market and get feedback on what these small businesses want in their contracts; Microbusinesses can help shape how they are treated by major corporations that have been largely neglectful of this demographic until now.

The final two measures will also be announced in Autumn, which are said to be intended for mandating Broker Dispute Resolution and supporting a 14-day contract cool off period, expected in January 2022.

Regardless, OfGem’s primary confirmed proposals are as follows, with the goal of being set into place in Autumn 2021;

  • Provision of principal contractual terms: This will strengthen rules to ensure that consumers receive key information about pricing and other contract information before they make an agreement. This is particularly important for customers who are microbusinesses, as it ensures they’re aware of all the basics upfront so there are no surprises later on down the road.
  • Brokerage cost transparency: Regulations are being proposed to help small business owners better understand how much they pay for brokerage services. The UK’s financial regulator has announced that it will be regulating the way in which firms charge their customers fees related to intermediation or a process whereby one party acts as an intermediary between two parties who want to either buy something from each other or sell some things of value. Regulations would require these brokers to provide specific information about what types of service and the costs associated with them on contractual documentation provided at any point while negotiating a contract – before accepting terms, once agreeing on terms and again when signing documents confirming the agreement is made final.
  • Broker Dispute Resolution: Introducing a requirement for suppliers to only work with brokers signed up to an alternative dispute resolution scheme. This means that in a dispute, there is an absent party to watch over them.
    • Banning notification requirements: Microbusinesses, in most scenarios, will no longer be expected or required to provide notice when they decide to switch from one supplier to another.
    • Information and Awareness: Working side-by-side with Citizens Advice to generate new and updated information for microbusinesses so that they can access up-to-date guidance, advice, and communications on how the legal market operates as well as their rights.

    In OfGem’s Impact Assessment Form, released on their website, they shared this intention as quoted below;

    “A microbusiness who has a dispute with their supplier that they cannot resolve through the supplier’s complaints handling process can seek independent redress with the Alternative Dispute Resolution (ADR) scheme operated by Ombudsman Services. However, there is no mandated route available to microbusinesses allowing them to pursue independent redress with their broker.

    To amend this protection gap, we propose creating a supply licence condition requiring suppliers to only work with brokers signed up to an ADR scheme. This would allow microbusinesses to raise a complaint to the ADR provider if they cannot resolve a dispute directly with their broker.

    The proposed licence conditions will set out high-level requirements for an ADR scheme. The scheme provider(s) will set out detailed scheme arrangements and requirements in their terms of reference.”

    The same report highlighted that complaints about third party sales have increased in the past year. In 2019, suppliers were receiving an average of around 1000 complaints per month about these activities- this was roughly 6% of all total supplier issues made known to them last year!

    The number of customer complaints against brokers has been low, though, since Ofgem started monitoring their activity, but it may be time for a closer look at that data as their sources have suggested there are new reports coming through from customers who fear they’ve fallen victim to some form or another unauthorized sale.

    The debate over a Broker Code of Conduct continues to rage on. Last year, the government announced plans for TPI regulation in its Energy White Paper and has now confirmed that it will be consulting with stakeholders over wider energy market reform before deciding whether or not to pursue this policy further.

    OfGem also included an “Assessment of benefits” within their report that included a number of promising factors, such as;

    • Clearer Brokerage Costs: To ensure full transparency, it was proposed that suppliers be required to provide all Principal Terms of a contract in plain and intelligible language before entering into an agreement. Furthermore, customers should always receive any brokerage costs associated with their contracts for them to make informed decisions about the arrangement they are signing up for.
    • Broker Dispute Resolution Mechanism: Microbusinesses will get a sense of relief knowing their complaint can be resolved by using an ADR scheme. Additionally, brokers and suppliers alike have additional protections against legal repercussions for any incorrect or malicious assertions made during the course of business negotiations. One of the benefits of this proposal is that it will provide a third party for microbusinesses and brokers who have complaints about one another. The ADR scheme will also be able to help supply information on broker issues, which should lead to increased trust in the market as well as more confidence from all parties involved.

    Costs

    Implementing the above processes, suppliers will be expecting a cost to occur over time, and OfGem’s report estimates three priority costs for those to consider;

      Concerns were raised by some suppliers over whether or not they would need to consider if there’s increased risk for business loss due to an extended customer’s right of withdrawal during the first two weeks after the contract initiation date (the ‘cooling-off’ period). This is important as exit may then be likely to happen after a supplier has already purchased the product needed in order to power their contract, resulting in a loss.

      • The costs surrounding a Broker ADR Scheme have also been highly discussed, and difficult to consider due to the different natures of each ADR Scheme and what type of dispute/s it may handle. A broker ADR scheme will need to recover costs associated with setting up the scheme, ongoing fixed running costs, and ongoing variable running costs.

      These costs will include creating the scheme’s rules and documentation, IT system costs, broker onboarding costs, and recruitment training. We anticipate recovering set-up costs should form part of annual subscription fee’s and that it would take no longer than a three-year period to fully recover them.

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