A strengthened ombudsman – but at what cost?

Energy secretary Amber Rudd is determined to appear tough on energy suppliers.

She told the Conservative party conference last week she would keep wayward energy suppliers in line. “Where companies have developed a pattern of bad behaviour, they will have no hiding place,” she told party members. And the ombudsman had been singled out to be the bloodhound of bad behaviour, and will be given powers to act upon its findings in a “strengthened role”, Rudd said.

But an ombudsman able to identify wider issues is nothing new. The Ombudsman Services Energy (OSE) is already tasked with such a role. What Rudd’s announcement hasn’t addressed is how the barriers to fulfilling this role will be removed; including a lack of funding from its current revenue model.

Rudd appears to be acting upon the findings of a review published in early October and undertaken by Lucerna partners on behalf of the regulator Ofgem which outlines a wider future role for the ombudsman. It found that the OSE’s future work should build on its handling of individual complaints to use that data in identifying the root cause of repeat issues, and move to dealing with fewer, harder individual cases.

Currently OSE is funded through an annual membership fee paid by all licensed energy providers which is topped up by a case fee for each complaint case. This leaves the burden of maintaining the service with those companies whose customers benefit most from it.

The department of energy and climate change (Decc) said expanding the ombudsman’s role will not necessarily increase its costs. A spokesperson for Decc said “there will only be an additional cost if the Ombudsman receives more complaint referrals.”

But this is not what the review found. It said “because the OSE relies on revenue from cases to fund operations, it could be less likely to tackle the industry on difficult issues. There is some evidence that the OSE is reluctant to undertake wider work because such work is ‘not funded’ through existing case fees.”

Costs are expected to mount to meet the new needs of an ombudsman which will need new skills and new data systems. The report identified “little overlap” between the skills needed to handle specific complaints and the skills needed to identify wider systemic issues. The ombudsman’s new data system “may not currently capture the complaint data in a way that is useful for interrogation to identify wider systemic issues,” the report found. 

And just as costs are set to rise, its revenue may be about to fall. Lucerna also found that the OSE’s current high volume of complaints cases – more than 15,000 in 2013/14 – are unlikely to last and a move to fewer, more difficult cases will impact “OSE’s resource levels, skills and capabilities,” not to mention cut down on a major source of revenue.

As both the review and Decc point out, the OSE and Ofgem have the power to amend the OSE’s business plan and case fees, so energy providers should not be surprised if Rudd’s announcement results in a hit to all their pockets, whether they top the customer service leagues or languish at the bottom.

How clarity will be achieved has at least been addressed. OSE said it plans to have an “early meeting with Energy UK, Ofgem, Citizens Advice and the energy companies to discuss how we can increase the effectiveness of the work we do in preventing problems and improving customer service across the industry.”

As well as clarity this should also address concerns held by OSE on how to maintain impartiality while taking on a role more akin to a regulator.

Independent review’s main findings:

Funding

The fee structure of the OSE, which collects funds from individual cases, does not currently provide sustainable revenue from identifying wider issues.

According to Lucerna “[senior management] have concerns as to how it should be funded if the OSE were to expand its role,” as the “activities that might be needed to underpin these functions do not appear to have been planned into the business plan.”

Clarification of role and alignment of goals

Lucerna found that Ofgem and OSE may have different expectations on how much identification and reporting should be being undertaken for systemic issues. While senior management at OSE agree that OSE should be undertaking this kind of work, Lucerna found “uncertainty about how it should do so and what is involved.” The lack of key performance indicators (KPI) attached to this role was also given as a reason why OSE has instead focused on resolving individual complaints, where KPIs are in place.

OSE believes it core function of resolving individual complaints requires it to remain impartial and independent, Lucerna said it “heard some caution about how challenge to the firms would be received,” with senior management believing that performing a role more akin to a regulator might compromise its’ impartiality.

Dedicated referral system

Identifying systemic trends currently relies on “the initiative of a small number of key individuals, particularly the energy relationship manager, to actively investigate and question enquiry and investigation teams to identify trends and issues.” Not only does the identification rely on individual initiative to ask the right questions, there is also not a dedicated recording or referral system in place for informing Ofgem.

Lucerna particularly noted the inability of OSE’s data collection systems to “capture the complaint data in a way that is useful for interrogation to identify wider systemic issues.”

Ombudsman’s current role in identifying systemic issues:

•OSE to have procedures to identify systemic problems and refer to appropriate organisation
•OSE must have process for identifying and reviewing cases with wider implications
•Annually report on any systematic or significant problems that occur frequently of which the ADR entity has become aware due and recommendations to avoid or resolve such problems
•Ombudsman duty to recommend systemic changes in policy or procedure relating to dispute handling in a service sector (and discretion to publish such recommendations)
•OSE to bring to Ofgem’s attention any trends or issues of concern across the industry that it considers are arising
•OSE (and Ofgem) to share information on emerging generic issues