Microbusinesses left saddled with debt they do not owe

Citizens Advice has found frequent examples of microbusiness customers being penalised by their energy supplier over debts they do not owe.

The consumer charity was responding to Ofgem’s call for input on whether regulatory changes are needed in the non-domestic energy supply market.

It specifically raised concerns over the size of security deposits being required by suppliers from their microbusiness customers, defined as businesses which consume no more than 293,000kWh of gas or 100,000kWh of electricity each year or has fewer than 10 employees and an annual turnover not exceeding £1.8 million.

Citizens Advice said it has “clear evidence that suppliers are not being proportionate or reasonable regarding charges necessary to secure a contract”.

It added: “There is currently insufficient guidance for suppliers on how security deposits and other charges such as reconnection fees should be calculated, or on how information about these charges should be presented to consumers. This results in an extremely wide range of practices around the issuing and collection of charges relating to contracts.”

While acknowledging some examples of good practice, the charity said it can confidently state that the majority of customers contacting it regarding difficulties setting up a contract are facing barriers of high and unreasonable upfront charges, including security deposits, based on debt from previous tenants.

“Concerningly, analysis of our case data also found frequent examples of customers who had recently moved into new premises being charged large security deposits, calculated based on debt that they could not owe,” it said.

Based on a sample of cases from its data, the charity said the customers it surveyed who had recently moved into their business premises were being charged on average a security deposit of £6,000.

It expressed concerns that as they were new businesses, many customers were unable to pay the money demanded and highlighted how many did not want to pay at all as they did not owe the amount stated, meaning that they were unable to enter into a new contract and start trading.

Further concerns include the fact customers in this group were impacted by “unreasonable change of tenancy requirements”.

The charity explained that as suppliers have no obligation to pause a debt collection or disconnection process while a debt is being disputed or challenged, customers were being actively pursued for a previous tenants’ debt while they were gathering the necessary documentation.

“In many cases, the documentation required appeared excessive, and would have been impossible to obtain before disconnection,” it added.

Citizens Advice makes a number of recommendations to tackle the issues concerning microbusinesses and the security deposits required for them to be supplied with energy.

As well as more guidance for retailers on when security deposits are required and on how much is reasonable to request, the charity is calling for more direct regulation.

It recommends that Ofgem outlines circumstances in which it is fair and reasonable to request a security deposit, as well as provide guidance on how this may be calculated and request that suppliers provide a breakdown of how a security deposit is calculated to the customer.

It also calls for the regulator to consider introducing standard licence conditions for non-domestic customers concerning security deposits, based on aspects of existing licence conditions, ensuring that further guidance is issued to outline a definition of reasonable.

The charity added: “We recognise concerns expressed by some sector voices that introducing too much regulation in the non-domestic sector around contracting and contract renewals might hamper competition and innovation.

“However, much of the good practice that these recommendations promote is already carried out by responsible energy suppliers and will not result in significant process changes.

“Introducing regulation to increase transparency and ensure reasonable security deposits will only have the effect of improving or eliminating poor practice and bad actors.”