The changing compliance landscape

In recent months, Ofgem has been increasing its engagement with suppliers to ensure compliance with their supply licences and to deliver more resilient business models. This has been evidenced through a number of actions, such as stress testing suppliers and introducing additional reporting requirements, under the scope of the regulator’s retail financial resilience plan, which launched back in December 2021. We have also seen Ofgem enforce its stricter ‘fit and proper’ requirements, and even the regulator’s first formal supplier licence application refusal since 2002.

Many of Ofgem’s decisions have been driven by the continuously volatile market conditions and large number of supplier exits last year. Now, it is further fuelled by the scrutiny of market players and reports on the retail market from the National Audit Office (NAO), Oxera and the Business Energy and Industrial Strategy (BEIS) Select Committee.

All these reports largely align with each other to say that while the steep increases in wholesale prices could not have been avoided, Ofgem and BEIS did not do enough in previous years to prepare for the external shocks the market has taken, with what the NAO report dubbed as a ‘low-bar’ approach to evaluating market entries. The BEIS Committee report on the future of the market evidenced areas of shortfall within Ofgem, but did not hesitate to add that the regulator was not always offered the support needed from BEIS. Subsequently, it has set out several requirements and recommendations for both the government and Ofgem to improve operation and regulation of the market.

Before these reports were issued however, one of the steps Ofgem has been taking to address market resilience is through the compliance assessment reviews for domestic suppliers in the market. They were first announced in April, revealing four key areas of interest: supervision of direct debit handling, customer credit balance holdings, higher customer service standards and ensuring suitable vulnerable customer support. Following this, in May the regulator announced an additional four areas of interest, focusing more on how fit to operate suppliers are, for example through reviewing their approaches to risk management, and their levels of asset ownership and control. Ofgem has stated that the reviews are intended to “start a culture change in our engagement with the energy retail sector”. There appears to be a determined attempt being made by Ofgem to initiate a change in the landscape around compliance and the monitoring of suppliers.

The outcome of Ofgem’s first review has since been published, which looked specifically into how suppliers set their direct debits and sought to identify any weaknesses within supplier processes that could result in incorrect direct debit setting. The review concluded that while direct debits were not being widely inflated across suppliers, it did identify five suppliers as having ‘moderate to severe weaknesses’, along with a further seven identified with minor weaknesses. Some of the key issues identified include a lack of documented policies or guidance for staff, and poorly structured approaches to setting customer direct debits. Ofgem has set out the next steps for the 12 named suppliers to take in response to the review and ensure rapid improvements follow. This appears to address one of the other points made within the independent reports on Ofgem’s operation, being that it was not fast enough in its decision-making and implementation of changes – something the regulator is clearly driving for with these reviews.

Ofgem has said that these reviews should have a beneficial impact on consumers of the future. The compliance assessment reviews may be a positive step, but while the regulator works to implement measures that will improve the resilience of suppliers, the question remains: is Ofgem doing too little too late to try and improve the framework for compliance when it may have benefitted from more robust oversight in previous years? An increase in engagement with suppliers around compliance should produce a strengthened market, but exactly how much of an impact these efforts will have on improving the overall framework that the market operates in remains to be seen.

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