In late March 2022, Ofgem published their final decision on the outcome of the Microbusiness Strategic Review (MBSR) – a project to identify and resolve challenges for microbusinesses as customers in the energy market. The regulator’s decision has extensive impacts for end users as well as suppliers, and it is worth tracking how the review arose and will transpire for the retail energy market.

MBSR origins

In Ofgem’s Forward Work Programme 2019-2021, the regulator noted that ‘microbusinesses face many of the same issues as domestic consumers’.  Ofgem committed to taking steps to better understand the issues microbusinesses face and act so that microbusinesses can access a competitive retail energy market and secure appropriate levels of protection.

Enter the MBSR: Ofgem’s action in 2019 to meet their Forward Work Programme commitment. The MBSR paid particular attention to how microbusinesses are treated by non-domestic energy brokers (also known as Third Party Intermediaries or TPIs) in the UK. Ofgem’s findings from the first phase of the review produced several theories of harm that it believed TPIs were causing in this section of the market.

The key theory categories include:

  • Awareness
    • Despite the Competition and Markets Authority’s attempts to improve price transparency, pricing is still not fully transparent, and it is difficult to compare prices leaving many microbusinesses unable to find the best deals.
  • Contracting
    • The supplier-TPI contracting process is, or is perceived to be, overly complex, costly and opaque, leading to some microbusinesses ending up on costly contracts with disadvantageous terms.
    • Microbusinesses often rely on brokers to switch suppliers, and weak broker regulation is allowing room for sharp practices, i.e., misleading customers regarding commissions and costs, not being fully transparent with principal contractual terms, brokers avoiding basic dispute resolution channels. Gaps in current consumer redress mechanisms add further to this harm.

The first MBSR consultation

Ofgem published its first MBSR consultation in July 2020, outlining a package of measures designed to reform the market, which included:

  • Broker conduct principle: Introducing a principles-based requirement for suppliers to ensure the TPIs they work with conduct themselves appropriately,
  • Broker dispute resolution: Introducing a requirement for suppliers to only work with brokers signed up to an alternative dispute resolution (ADR) scheme,
  • Informed contract choices: Applying targeted sales and marketing rules to suppliers and brokers they work with via supply licence changes,
  • Broker commission transparency: Clarifying and strengthening existing supply licence obligations to provide information about broker commission payments on contracts, bills and account statements,
  • Cooling-off period: Introducing a 14-day cooling-off period for microbusiness contracts,
  • Contract extensions: Requiring suppliers to maintain existing contract rates for up to 30 days while issues with a blocked switch are being resolved, and
  • Banning notification requirements: Banning suppliers from requiring microbusiness customers to provide notice of their intent to switch supplier.

These changes would be delivered via amendments and additions to suppliers’ licence conditions and see UK energy suppliers effectively regulate the TPI market.

It is important to state that Ofgem’s definition of a microbusiness captures over five million businesses in the UK, so these changes would have a significant impact on both broker and suppliers. Ofgem defines microbusinesses as businesses which:

  • employ fewer than 10 employees (or their full time equivalent) and has an annual turnover or balance sheet no greater than €2 million; or
  • uses no more than 100,000 kWh of electricity per year: or
  • uses no more than 293,000 kWh of gas per year.

The second MBSR consultation

After receiving responses to the consultation, Ofgem produced a series of draft licence condition changes and published a second consultation in June 2021. This consultation showed refinements to its initial plans and a final package of proposals:

  • Provision of principal contractual terms: Strengthening existing rules around the provision of principal contractual terms to ensure customers receive this key information both pre- and post-contract agreement in all cases.
  • Brokerage cost transparency: Clarifying and strengthening existing supply licence obligations to provide information about brokerage costs on contractual documentation.
  • Broker dispute resolution: Introducing a requirement for suppliers to only work with brokers signed up to a qualifying ADR scheme.
  • Cooling-off period: Introducing a 14-day cooling-off period for microbusiness contracts.
  • Banning notification requirements: Banning suppliers from requiring microbusiness customers to provide notice of their intent to switch supplier.
  • Information and Awareness: Working collaboratively with Citizens Advice to create new and updated information so that microbusinesses can access up-to-date guidance and advice alongside communications to help further boost awareness of how the market operates and microbusinesses’ rights as consumers.

The response to this final consultation, and the decisions and outcomes it would bring, was delayed significantly due to the energy crisis in the UK in late 2021. But, on 28 March 2022, Ofgem finally published their full, final position on the MBSR.

Regulatory response to protect microbusiness energy users

As expected after the review consultations, pre- and post-contract disclosure of commissions and third-party costs will be required ‘in all cases.’  This means:

  • The supplier must ensure that Principal Terms are brought to the attention of the customer both pre-contract entrance (in some form) and post-contract entrance (in written from) in all cases,
  • Key information about a new contract, including any brokerage costs, must always be brought to the attention of the customer,
  • Suppliers and TPIs must ensure that customers are fully informed about the nature of, and costs associated with, a contract they are being offered,
  • The new licence condition, SLC 7A.4, requires Principal Terms to be brought to the attention of the customer prior to agreeing to a contract with the supplier and broker:
    • For the avoidance of doubt, Ofgem does not consider that purely signposting a customer during a sales call (for example via an email or text message sent during the call) to a set of Principal Terms is sufficient to constitute bringing the Principal Terms to the attention of the customer. Instead, their interpretation of these requirements means that suppliers and brokers agreeing supply contracts verbally must clearly explain the Principal Terms of the contract to the customer before a contract is entered into,
  • Information on brokerage costs must be provided to microbusinesses via the Principal Terms, for all contracts, and this information must be presented as a total cost in pounds/pence covering the duration of the contract,
  • If a customer asks a supplier how much commission was in a contract with regard to a contract written before the implementation of these measures, they are expected to tell them:
    • This could have a significant impact on the nascent TPI claims company market and their ability to access details of ‘hidden’ commissions, and
  • This package of licence condition changes will be implemented by 1 October 2022 at the latest.

Suppliers will also only be allowed to work with brokers who have signed up to a qualifying Ombudsman-administered ADR scheme. This is important because:

  • Implementing this requirement will fill a clear protection gap and enable customers to resolve disputes via an independent body, and
  • Ofgem believes it will also help drive improved practice within the TPI community.

The Ombudsman website contains an onboarding roadmap laying out the activities and timelines brokers and suppliers will need to follow, the Terms of Reference brokers will need to sign up to, and documents detailing the customer-facing arrangements (such as complaints handling procedures) brokers will need to have in place before the customer can be fully onboarded. Ombudsman Services will run a series of workshops in the coming months to support brokers through this process.

Ombudsman Services intends to levy a subscription fee for each broker to pay to sign up to the scheme, along with case fees once the scheme goes live. This will be implemented by 1 December 2022 at the latest.

From 1 October 2022 at the latest, the new licence conditions will also ban termination notices, prohibiting suppliers from requiring microbusinesses to provide notice of a switch. This is important because:

  • Implementing this measure will mean that microbusinesses experience a smoother switching journey,
  • It will also reduce administrative burden for end users, suppliers and brokers,
  • Customers on evergreen/auto-renew contracts are exempt from this new rule.

Lastly, Ofgem have already implemented the Information and Awareness piece with support from Citizens Advice.

What is missing?

Ofgem have left out the previously proposed 14-day cooling off period from their final decision, but why? The first concern was the overlap with another regulatory design draft: the Switching Programme. The original timeline for the cooling-off period under the MBSR would have seen it implemented prior to the redesigning and rebuilding of systems under the Switching Programme. With the delay in publishing the final decision on protecting microbusiness energy users, the cooling-off period would only go live after the Switching Programme go-live date, therefore it was deemed no longer appropriate to pursue a cooling-off period designed in this way.

Concerns were also raised over the additional cost to customers from the cooling-off period. However, this was not explicitly mentioned as a reason for non-inclusion. Yet, Ofgem does state it believes that a cooling-off period could provide valuable protection for microbusiness customers who have unwittingly signed up to a deal over the phone, feel as though they have been misinformed or have been provided with incomplete information. Ofgem has committed to revisiting the cooling-off period proposal after the Switching Programme goes live.

The key thing to remember regarding the MBSR is that suppliers are responsible for ensuring all of this happens. Suppliers effectively now regulate the TPI market in their dealings with microbusiness energy users.

Can we expect suppliers to enact greater audit, governance and assurance of UK TPIs? Only time will tell.

I recommend you read Ofgem’s full MBSR response here.

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ElectraLink recently produced a series of podcasts where we interview representatives from various ends of the energy market and get their thoughts on how the Microbusiness Strategic Review will shape supplier-TPI relationships. Head to Vimeo and listen to The TPI Microbusiness Strategic Review: ElectraLink’s podcast series for suppliers.