Ofgem’s principles-based strategy is bearing fruit

The regulator will not let up in its drive toward principles base regulation, though prescriptive rules will still play a role, writes Rachel Fletcher.

Ofgem wants to see energy suppliers put customer needs at the heart of their businesses.

To help make this happen, we are changing the way we regulate so that we rely more on binding principles – overarching enforceable requirements that explain the experience for consumers we expect suppliers to achieve – and less on detailed rules.  Making this change is one of Ofgem’s top priorities and there are signs that it is bearing fruit.

In 2015, we launched a review of our rulebook, to strip out unnecessary rules and to introduce new principles to sit alongside the existing requirement to “Treat Customers Fairly”. Less than two years on, we have removed 50 pages of rules on supplier conduct. This week, we will replace the detailed rules on sales and marketing activities with five new principles requiring suppliers to help their customers make informed choices. 

There are further licence changes to come. For example, we will tackle the 100-plus pages of rules on bills and other communications. Many customers find these communications confusing. New principles covering this area will ensure consumers get the information they need in a format they can access and understand.

“There will be areas where a principles-based approach is not appropriate. Where we think there is only one acceptable way of treating customers, we will set this out in a prescriptive rule.”

We are convinced this principles-based approach – along with a significant step up in our own compliance monitoring and assurance work – is the most effective and sustainable way to achieve the treatment that energy bill payers expect and deserve.

• A small number of well-crafted principles will explain more clearly what we expect of suppliers than a long list of detailed rules. With nearly 60 domestic energy suppliers in the market, this clarity is more important than ever.
• A principles-based approach places responsibility firmly on suppliers for figuring out how to treat customers fairly. Suppliers will need to monitor consumer experience and use a range of methods to keep in touch with what their customers need.  
• Importantly, given how fast the energy sector is changing, principles allow room for suppliers to innovate in their service offerings. Prescriptive rules can stand in the way of new products or techniques – and risk leaving customers unprotected as technology or business models change.

Several years into this journey, we are seeing signs of change within supply businesses. Several have overhauled their operations to ensure they deliver what consumers need. Others have empowered frontline staff to respond directly to customers’ circumstances.  There is also evidence of industry leaders making better use of consumer insight to inform the way they run their businesses. 

As importantly, in Ofgem we are tracking the consumer experience more closely and changing the way we interact with suppliers. Close working with Citizens Advice and the Ombudsman has been crucial in this work. We have become quicker at raising issues with suppliers – and are better at giving them space to put things right. We’re also encouraged that more suppliers are coming to discuss potential issues with us at an early stage. We have hundreds of examples of these interactions resulting in suppliers improving the way customers are treated. We stand ready to take action to protect consumers’ interests where we see they have poor experiences.   I am hopeful that this approach will see a sustained decline in consumer complaints. Over time, it could improve trust in the industry.

This is not an easy transition. In particular, we need to build supplier confidence that Ofgem will continue to use its enforcement powers in a proportionate way and not simply because suppliers have taken a different approach to the one we expected.

Partly for this reason, there will be areas where a principles-based approach is not appropriate. Where we think there is only one acceptable way of treating customers, we will set this out in a prescriptive rule. It is not our intention to use a principle and hope that suppliers guess the right answer. Time limits on back-billing and maximum charges for installing a meter under warrant may be good cases in point.

By the autumn, we will have strengthened the requirement to “Treat Customers Fairly”, so we can continue to protect consumers effectively in the future. These changes will also make it clear that suppliers have to go the extra mile to address the particular needs of vulnerable consumers. 

The increased use of principles is vital to ensuring we have a rulebook that reflects society’s expectations and allows the industry to respond well to the challenges and opportunities that the future will bring. There is no letting up in our resolve to make this change.