Utility brokers: to regulate or not to regulate?

Should utility brokers be regulated? It is an argument which began in the energy market, and has been rumbling beneath the surface for years. While some insist that they should be, others say the last thing the market needs is more regulation.

With the opening of the business water retail market imminent, thousands of energy brokers are waiting on the side lines ready to pounce. And the debate about if and how they will be regulated has reared its head once more.

In the energy market, these brokers are unregulated and unchecked and this, Grand Union Water Company co-founder Peter Sceats argues, has encouraged some of the most “dreadful” customer service he has ever seen. “I call them ‘Flash Harry’ business tactics and they are at play in the energy market every single day,” he tells Utility Week. He insists that energy brokers “should be and should have been” regulated by Ofgem, and that those looking to enter the water market – which most agree is all of them – should be regulated by Ofwat.

Energy Managers Association (EMA) chief executive Rupert Redesdale agrees, saying that while the majority of third party intermediaries give good service and drive down prices, “there is a significant number who do not”. The EMA is concerned that these abuses will be replicated in water unless systems are put in place based around transparency to stop these practices.

Ofwat wants formal powers to regulate third party intermediaries (TPIs). It says that the involvement of these parties in the business water retail market could provide “many direct benefits” to customers, and support market development by facilitating higher levels of customer engagement and potentially encouraging a multi-utility market. However, it warns there is a risk that the activities of some TPIs may cause harm to customers, especially small businesses, and insists that formal market regulation will be important in ensuring customers are treated fairly.

Limited power

Gaining more power to regulate is not within Ofwat’s control. The decision rests with government which, for now, looks unlikely to budge on the current arrangements. The Department for the Environment, Food and Rural Affairs says it will “keep under review” whether Ofwat should have powers to prevent inappropriate marketing activities, as Ofgem has in the energy sector. In the meantime, Ofwat can only consider what voluntary codes of practice could be put in place for TPIs.

Ofgem has slightly more. if limited, power to regulate broker activity in the energy market under the Business Protection from Misleading Marketing Regulations. It decided to postpone its work on a specific mandatory TPI code when it referred the energy market to the CMA in 2014. “At the time, we told TPIs to take on voluntary principles to treat businesses fairly while the investigation was ongoing,” a spokesperson tells Utility Week. “The CMA found inconclusive evidence of TPI malpractice concerning micro-businesses. We will continue to monitor TPI behaviour and have powers to enforce the Business Protection from Misleading Marketing Regulations.”

There are already codes of practice in place.

The Grand Union Water Company is in the process of developing a ‘water procurement advisor code of conduct’ – a six-point voluntary code that prospective water brokers can sign up to. And the Utilities Intermediaries Association (UIA) – a utility broker trade group – requires its members to sign up and keep to a code. UIA operations director Rod Sinden writes in Utility Week: “Ofwat, like the gas and electricity regulator Ofgem, has no governance over TPIs and will be introducing only a voluntary code of practice. Many TPIs will claim they work to this, but if anything goes wrong it has no teeth, as the ultimate sanction is to use the retailers or suppliers arbiter which you can use whether a code of practice is involved or not.”

Rogue brokers

There are, of course, different varieties of ‘brokers’, and it is important not to place them all in the same category when talking about misselling and poor customer service. Senior partner at water management group H2O Building Services, Graham Mann, tells Utility Week the true definition of a ‘broker’ is the intermediary between a customer and a supplier, who will do a deal to reduce that customer’s costs by negotiating a discount on their gas, power and water costs.

“Where you’re going one stage further than that and talking about bundled services such as leak detection, trade effluent charge reduction sampling – anything to reduce the overall consumption and waste, then you’re talking about a water consultancy or a water audit expert, which also broker deals,” he says. Mann agrees that customers need protection from rogue brokers which offer poor service, but argues that regulating the entire broker market is not the answer. He suggests it would be best to see how things play out and address any glaring issues at the end of the year.

Northumbrian Water business development manager Colin Robinson writes on Twitter: “The clue is in the word rogue – if they are out to mislead then no amount of code of practice will stop them.”

The EMA has set up a voluntary code for energy sector, which Redesdale says no one signed up to – a sure sign that “voluntary codes don’t work”, he tells Utility Week. The group responded to Ofwat’s consultation saying it would like to set up a self-regulating code of conduct in the water market that would be based on its revised Ofgem draft code. Redesdale says Ofwat has the power to act against retailers which put business through a TPI that was not part of a self-regulated code.

Inenco chief commercial officer Dave Cockshott says he is “more than happy” with a voluntary code, but argues that many such codes “end up being rather lame”. “If you’re going to have a code of conduct it needs to have meaning and bite and make people nervous about signing up to it, that is when I think there is value in them,” he tells Utility Week.

Retailers blamed

Sales complaints received by Ombudsman Services in the energy market often relate to broker behaviour rather than supplier behaviour, says energy ombudsman Debra Vaughan. But because there is no regulation or redress in place for complaints about brokers, the ombudsman takes the complaint to be about the supplier, even though that supplier may not have done anything wrong.

She says Ombudsman Services would like to see regulation of brokers to improve consumer confidence not only in the market, but in the brokers themselves as well. “Separating out the two parts of the energy market which are otherwise linked, and putting a clear responsibility on each area should help improve customer awareness and confidence in the companies they use,” says Vaughan.

Some of the issues the ombudsmen come across are around the legal requirements of what is recorded during the sales conversation between a broker and a customer. As it stands, only certain parts of that conversation have to be recorded to confirm that a contract has been agreed. Vaughan says this means that, often, retailers “don’t know what sales bluff there has been before that”.

“The supplier gets a copy of the sales contract call recording, and when we get that in evidence when we’re investigating a complaint, we can sometimes hear reference that the customer makes to an earlier conversation. It is clear from that that something has happened that isn’t really playing out properly in the contractual part of the call.”

Ombudsman services has recommended that energy suppliers ask for the full call to be recorded, and Vaughan says water companies should prepare to do the same.

Until government makes a decision on whether brokers are formally regulated, it is up to the water industry to keep the bad customer service and rogue TPIs out of the market. Whether that is through a voluntary code of conduct or by insisting calls are recorded, Vaughan suggests the sector “do it sooner rather than later” and not “leave it to become a problem”. If the expectation is there in place from the start, it will much easier to keep it that way.