Suppliers slam Ofgem over direct debit ‘name and shame’

Utilita Energy has slammed Ofgem for opting to “name and shame” suppliers over their direct debit practices after a review by the regulator identified the prepayment meter specialist as one of a number of companies to have flaws with its procedures.

A spokesperson for Utilita said it was “shocked and disappointed” that Ofgem had published its findings without waiting for suppliers to respond to a follow-up request for further information and evidence.

Ofgem said its published findings represent an “initial snapshot” and affected suppliers will now have two weeks to submit action plans setting out how they will improve.

“While we are happy to support Ofgem when the need to act publicly is clear, we disagree that at this early stage in the compliance engagement Ofgem should formally name and shame suppliers without any official finding,” the spokesperson for Utilita stated.

“This sets a dangerous precedent and goes against two of the very principles of good governance, objectivity and integrity, that public bodies should uphold.”

The review findings

Ofgem ordered suppliers to take “immediate and urgent action” after its review identified a range of weaknesses or failings in the way they charge direct debits to customers.

Of the 17 large suppliers in the domestic retail market, seven were found to have “minor” issues with their direct debit practices, whilst six, including Utilita, were found to have “moderate to severe” flaws.

The review found that over 7 million customers on a standard variable tariff (SVT) saw a hike in their direct debit between February and April 2022, with the average increase of 62% mostly reflecting the rising cost of gas.

However, Ofgem said 8% of SVT customers – around 500,000 households – experienced an increase of more than 100%.

Although it has not found evidence of unjustifiably high direct debits, the regulator said it is concerned at the size of these increases and wants to ensure there is a good reason for them such as customers coming off an SVT or higher energy use. It is therefore requiring all suppliers that hiked their customers’ direct debits by more than 100% to review them.

Where appropriate, Ofgem said it expects suppliers correct any miscalculations, including making repayments if necessary, and consider whether goodwill payments are warranted.

The review also found that the policies and processes of some suppliers are not formally documented, creating the risk of inconsistent, incorrect or poor treatment of customers.

Ofgem said it recognises that increases will differ depending on a range of factors, and that some of these, such as recent tariff changes, high debit balances or recent meter reads, can lead to large adjustments to direct debits.

However, the regulator said it is up to suppliers to ensure that direct debits are set correctly based on all relevant information available and that changes are clearly communicated in a way that helps consumers understand their payments.

“Suppliers must do all they can, especially during the current gas crisis, to support customers and to recognise the significant worry and concern increased direct debits can cause,” said Ofgem chief executive Jonathan Brearley.

“We know there is some excellent service out there, but we want to make sure that it’s consistent and standard across the board. It’s clear from today’s findings on direct debits that there are areas of the market where customers are simply not getting the service they need and rightly expect in these very difficult times.”

Four suppliers – British Gas, EDF, Scottish Power and So Energy – were found to have no significant issues. Although they generally had robust processes in place, Ofgem said it has nevertheless made some recommendations for improvements and it is still asking these suppliers to review customers’ direct debits to ensure they are correct.

Seven suppliers – Bulb, Eon, Octopus Energy, Outfox the Market, Ovo, Shell and Utility Warehouse – were found to have some “minor” weakness or gaps in their processes that could lead to poor outcomes.

Ofgem said examples included a lack of documented policies or guidance for staff, potential failure to account of all relevant factors when setting direct debits and risks that some direct debits are not evaluated when appropriate.

And six suppliers – Ecotricity, Good Energy, Green Energy UK, Utilita Energy, TruEnergy and UK Energy Incubator Hub – were found to have “moderate to severe” weaknesses.

Ofgem said these covered a range of issues, including inadequately documented or embedded processes, weak governance and controls, and the overall lack of a structured approach to setting direct debits. It said in some cases these problems could lead to direct debits being set incorrectly or not being evaluated for long periods, causing the build-up of unnecessarily large credit balances or debts, depending on whether customers are over- or underpaying.

The regulator said it is working with these suppliers to bring about rapid and robust improvements to processes and reassess direct debits where necessary. If they don’t react fast enough, Ofgem said it will consider enforcement action.

Ofgem singled out TruEnergy and UK Energy Incubator Hub in particular as having “severe” weaknesses, stating that both suppliers lacked a consistent and structured approach to setting direct debits. The regulator said it had major concerns over the maturity of their processes, adding that customers had been put at serious risk of inconsistent or poor outcomes.

UK Energy Incubator Hub recently ceased trading, with Octopus Energy being appointed to take on its customers as the Supplier of Last Resort, and so Ofgem said it will not pursue any further action against the company. However, the regulator said it is now considering whether enforcement action against TruEnergy is warranted.

Propping up balance sheets

As well as criticising Ofgem for publicly shaming suppliers based on its initial findings, the spokesperson for Utilita Energy also disputed the regulator’s classification of the company as having moderate to severe weaknesses.

“It is particularly outrageous since other suppliers have hundreds of millions of pounds in customer credit balances sitting on their balance sheets that could have only materialised because they have set direct debits too high,” they remarked. “And yet Ofgem says they don’t have any significant failings.”

The spokesperson said Utilita fully supports Ofgem’s proposals to introduce a code of practice to govern the way energy suppliers set direct debits, stating: “It is clear that in the past some suppliers have used excess direct debit collections to prop up their balance sheet.”

But they said Utilita has “never” done this: “The vast majority of our customer base is prepay and consequently direct debit collections are not that significant.

“When setting a direct debit, we simply estimate the expected cost of energy over the next 12 months based on industry accepted estimates of consumption and prevailing prices. We then add or subtract the current balance and divide by 12.

“The only complication is that we also operate a dead band to avoid changing direct debits by an insignificant amount. This is a very simple rule and is hard-coded into our systems.”

Last month, Ofgem confirmed plans to ring-fence customers’ credit balances and Renewables Obligation payments due to concerns that some suppliers were using them like “interest-free credit cards”.

The proposals were welcomed by Centrica chief executive Chris O’Shea but branded “financially illiterate” by Octopus Energy boss Greg Jackson, who said they would increase costs for consumers. Jackson instead proposed an “ATOL-style” insurance scheme.

Further reaction

Other suppliers were also critical of Ofgem’s findings on direct debit procedures, with Ecotricity founder Dale Vince stating: “We have always included credit balances in direct debit calculations, but our new billing system, which we installed during the pandemic, didn’t do that, so we began an upgrade in January this year.

“This is in testing now and will go live in six weeks.  We told Ofgem this but unfortunately, they took no account of it in their assessment.”

Green Energy UK said it was “disappointed” to have been labelled as having moderate to severe weaknesses, adding that it has “genuine concerns” that the information it provided to Ofgem was “misunderstood or ignored”.

Chief executive Doug Stewart said: “Ofgem has highlighted areas where we can make improvements and we are already taking action to address these areas.

“However, I do feel that given the challenging state of the market, Ofgem needs to resist knocking suppliers, like ourselves, who have survived the market crash and doing our very best to help customers.”

A spokesperson for Good Energy said: “Ofgem raised just one concern about our direct debit governance. It relates to internal documentation and we are taking rapid action to address it.

“With rising energy costs across the industry, it is understandable that this issue is receiving attention. For this reason, we recently took the proactive decision to conduct our own full review of our process and found that it is fair and consistent for our customers.

“They can rest assured that we take a proactive approach to setting their payment levels across the year, without resulting in debt or significant levels of credit.”

TruEnergy said in a statement that it “welcomes tougher regulation from Ofgem and is working with the regulator to demonstrate full compliance with all areas of its supplier license conditions.”

Energy UK director of advocacy Dhara Vyas commented: “Steep rises in energy bills have meant big increases in direct debit payments, which can also be triggered by changes in tariffs, high debit balances or an updated meter read. Given the situation, it’s right for Ofgem to check how suppliers are setting these.

“It’s good that the regulator has found that the majority of suppliers have only minor issues with their processes and, where action is required to make further improvements, providers will work with the regulator to ensure these are in place quickly.”

She continued: “Suppliers are required to set direct debits at a level that allows the customer to pay the same amount each month, without running up too much credit and or getting into too much debt, basing this on each customer’s individual circumstances – taking into account factors like energy usage and record with previous payments.

“Doing this at a time when energy bills are rising rapidly can be challenging so it’s important that all suppliers’ processes are as robust as possible so that customers can be confident these are being set fairly.”