Ofgem mistaken to delay TPI standards

David Hunter argues that Ofgem’s slow pace toward standardisation and a clear code of practice for third party intermediaries is undermining the ability of businesses to make informed decisions about the energy advisory partners they use.

Ofgem opened its consultation on the non-domestic Third Party Intermediary (TPI) sector more than two years ago, in an attempt to regulate and improve the relationships that customers have with their advisors.

As business energy costs have risen and markets have become more complex, it has been recognised that TPIs provide valuable and varied services. Their role in helping consumers understand their energy use and optimise its cost is more widely acknowledged and valued. However the lack of oversight in the industry has led to concerns over lack of transparency, instances of poor behaviour from intermediaries and questions over the independence of advice.

Having consulted widely and made progress towards the establishment of a mandatory Code of Practice for participants, the regulator then essentially kicked the process into the long grass. Ofgem has preferred to wait until the outcome of the Competition & Markets Authority’s wider review into the energy market before progressing with its own plans for regulation. This is a mistake.

While it is understandable that Ofgem has found the sector challenging to get to grips with due to the diverse nature of participants and services provided, the drive to improve TPI standards is too important to be delayed. In particular, transparency regarding fees and services provided by TPIs is vital. It helps to build trust with customers as well as their understanding of what’s available in the market, and at what cost. In the absence of a Code of Practice, Ofgem has issued “principles” to which it expects TPIs to adhere, however these are vague, insufficient – and voluntary.

“Ofgem has preferred to wait until the outcome of the Competition & Markets Authority’s wider review into the energy market before progressing with its own plans for regulation. This is a mistake.”

With regard to fees or commission for example, it recommends an intermediary should only state how they are being paid for placement of a supply contract, before that contract is signed. Does the notification that “the fee is included in the contract price”, buried deep in communication, really suffice? In order to make an informed decision, customers need better information, earlier in the process.

In terms of scope, it should be clear what services will be provided; how and when they will be delivered. On cost, TPIs should be obliged to state and quantify all remuneration that they will receive from the customer and/or the supplier for any procurement and management services relating to energy supply contracts. Both TPI and supplier should be obliged to disclose the full amount and rate of commission paid on any contract, past or present.

Finally, it should also be made transparent that the advisor is truly independent from the supplier. Can they be described as such if they accept differing rates of commission from different suppliers? Only when these issues are made fully transparent can customers believe they are getting the best possible deal.

It is clear that the TPI sector benefits consumers, and that there are many accomplished service providers in the market. At the same time, the good work of many is put at reputational risk by the less scrupulous few.

As part of its continuing engagement in the process, Schneider Electric has asked Ofgem to undertake its own information-gathering exercise with suppliers to understand the amounts of commission earned by individual brokers, and the unit rates at which they are paid. This would highlight the extent of these fees in the market, and also allow scrutiny of excessive payments. The ‘hidden commission’ mechanism that is prevalent in the sector needs to become a thing of the past, in order to increase trust and improve competition.

It is also important that the evolution of the TPI market is understood. The future of energy will be greener, more decentralised, dynamic and dependent on technology. Demand-side opportunities will flow into the mainstream and change the dynamic of top-down energy supply (and procurement) forever. These changes will redefine the question “what is a TPI?”, and regulation will have to be up to the challenge of evolving to cover the right activities.

Already, the growth in importance of sustainability and compliance issues for customers is leading not only to niche providers that exist outside of the traditional procurement space, but also the blurring of lines between TPIs and energy suppliers. Some suppliers are diversifying into energy services, increasingly in competition with the “traditional” advisors. This creates choice for customers, but also raises questions about the appropriate role of suppliers in TPI regulation, which should be completely independent of market players.

The delay in introduction of a code of practice for the TPI sector is frustrating. Good service deserves to be endorsed, while poor practices should be highlighted and eliminated, and that shouldn’t wait for the CMA review. Transparency will increase consumer understanding of the value of services on offer, and help to promote informed choices and competition. Raising standards will improve the reputation of the industry and further build energy buyers’ confidence in TPIs. Why wait?