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Fighting for a Code of Conduct
The first rule of the Code is that there is no Code. No I’m not talking about Fight Club but something that is even more of an enigma: an official Code of Conduct for energy brokers - or third party intermediaries (TPIs). When any of the UK’s 2 million premised small businesses (SMEs) buy their energy through a broker - and about a quarter of them do - they do so without regulatory protection. The vast majority are well looked after but not everybody is. And it’s the unlucky few, hoodwinked by rogue TPIs, that keeps alive the need for a Code.
The TPI landscape is dominated by a dozen or so main players, as subscribers to Cornwall Insight’s quarterly TPI Index will well know. However the total number is thought to be in excess of 1,000 when including all the one-man bands - or ‘bedroom brokers’ - who can set up without experience, training or qualification. In 2016 TPIs were collectively responsible for revenue estimated at £263m a year. With this much at stake - in an unregulated environment - it’s no wonder we hear of malpractice or high-commission deals that benefit anyone but the end user.
Those long-in-the-tooth will remember the days of EnergyWatch and the subsequent Consumer Focus 2009 consultation and know that talk of a Code for intermediating SME energy has been rumbling along for quite some time. Indeed, having routinely attended Ofgem’s TPI Working Group meetings over the years, we’ve seen the formation a Code building… slowly but surely. So when Ofgem referred - or perhaps escalated - the Code to the Competition & Markets Authority as part of its energy market investigation we naturally assumed it would be a shoe-in. Indeed our dialogue with the CMA has always stressed that the Remedies they’ve proposed (not to mention a few more we suggested along the way) would work best when a Code has been put in place.
So when the two year CMA investigation effectively put the development of a regulator-run Code on ice before concluding – due to ‘insufficient evidence’ – that it would not be a mandatory requirement, we were surprised to say the least. And we’re not alone. A recent webinar run by industry analysts - Cornwall Insight - said that interest in a Code from the TPI sector was ‘as strong as it’s ever been’. Suppliers want it, TPIs want it. Trade Bodies like the FSB are pushing hard for it and, get this, SME energy consumers (in focus groups that we’ve organised) assume one already exists and are frankly shocked to learn that TPIs are, in fact, an unregulated bunch.
So good luck to the Retail Ombudsman who is looking to launch a voluntary Code this year and who may just find themselves in the right place at the right time. For what it’s worth, here our 5 things that a Code needs:
- Being voluntary for TPIs won’t deter the rogues – unless the suppliers treat it as mandatory.
- Commission disclosure has to be done in the right way – not too onerous and what customers consider to be best practice.
- Letters of Authority ought to be a key ingredient in anything that bridges the gap between customers/TPIs/Suppliers.
- Running costs should be funded by those who’ll benefit – ie TPIs as well as suppliers.
Produce evidence of positive action taken to identify, expose and punish malpractice
Mandatory Whilst introducing a Code without regulatory involvement is only ever likely to be voluntary, it can be mandated in other ways. EG As with ‘banning’ auto-rollover contracts, the majority of suppliers adopted this on a voluntary basis (albeit under pressure from No.10) years ahead of the CMA.
Commission Disclosure If, as a TPI, you’re worried what a customer will think of how much you are earning from their deal… then you are probably earning too much. Put it this way: would you recommend your friends and family to use your service and pay your fee or would you tell them to take their chances and go direct?
For the record, Make It Cheaper is one of the few TPIs who take the trouble to explain to customers how we earn our money and how our commissions are the same regardless of the supplier they choose. The precise value of commission when quoting a customer is not immediately available to our sales agents, so we disclose a typical range based on their consumption band. The precise fee we’ll earn can then be offered as a follow up via a call back or confirmation email.
In our experience of fee disclosure, there are two common types of customer: those that are indifferent (as long as they are getting a good deal) and those that are pleasantly surprised by the degree of transparency. For the latter, it is a trust builder that is best communicated by TPIs in their own way, rather than via a supplier’s customer communications. EG in the context of ‘this is the level of service you can expect in exchange when using us’. And, if TPI Code members are required to disclose their commission then - candidly - shouldn’t suppliers disclose their margin as well: to level the playing field?
Letters of Authority LOAs go naturally hand-in-hand with a Code. TPIs can use them to obtain information (eg consumption data) that leads to a more accurate quote and suppliers will be reassured know that Code members are using LOAs in the right way. Mandated digital LOAs - responded to in a timely and consistent manner - would also help reduce the level of Objections raised and increase the ease with which they can be resolved by a TPI. Going back to commission, an LOA is also an opportunity to explain - upfront - how the fee structure works and how, in principle, a TPI might be paid. See our research paper Switching on Small Business for more details.
Funding Options TPIs will benefit from an industry-wide Code so ought to contribute to its running costs alongside suppliers. Meanwhile, consumers will want to know a Code has teeth. If this means asking larger TPIs for a larger contribution to demonstrate they are good to do business with, then so be it. The best parallel we can draw on is with the FCA accreditation for our SME insurance business. Every broker needs, and wants, this accreditation and the bigger you are, the bigger the fee. If smaller brokers struggle with the cost or compliance required to qualify, it is not unknown for insurers to help out – ie they are prepared to ‘back their channel’.
Rogue Action And perhaps this is where Ofgem - who appear to be lacking evidence - can get involved? One suggestion we made to Ofgem was that its TPI Working Group’s email address (firstname.lastname@example.org) be used to keep a dialogue open and report abuse / rogue traders. Sadly we suffer a lot from of impersonators who – on a cold call – will use the Make It Cheaper name to try and trick our customers into a new verbally-binding contract. So we would also like to see cold-calling restricted and sensible contact rules for any kind of outbound sales activity included in a Code.
If a voluntary Code can get all TPIs - and suppliers - behaving like this in unison then the second rule of The Code will be that we don’t actually need one after all.