OFGEM’s failed scheme to protect small business customers: The great ADR swindle

OFGEM’s failed scheme to protect small business customers: The great ADR swindle

By -Published On: January 18, 2024-Categories: Business, Energy Consultants, Market Insight, News-

In March 2022, a significant development unfolded in the energy consultancy sector as Ofgem decided to implement an Alternative Dispute Resolution (ADR) scheme for Micro business customers.

The Energy Consultants Association (ECA) has undertaken an in-depth review of this implementation, especially scrutinising the underpinning evidence and its wider implications.

Scrutinising the Evidence Behind Ofgem’s Decision

Ofgem’s decision was largely influenced by reports from the Citizens Advice Bureau (CAB), indicating that bad brokers were causing consumer distress.

However, the actual evidence was less than conclusive.

CAB had referred only to a percentage of calls about energy brokers over a short period.

A Freedom of Information request revealed that there were just 197 complaints about brokers from 2020 to 2022, and the categorisation for Micro businesses was unclear, casting doubt on the reliability of this data (as the CAB never distinguished whether a complaint was from a micro business).

Brokers’ Reaction to the ADR Mandate

By Spring 2022, brokers were informed by Ofgem and suppliers that enrolment with the Energy Ombudsman (EO) as the ADR provider was mandatory.

Consequently, hundreds of brokers signed up, despite potential uncertainties about the scheme, to avoid the risk of being unable to trade.

Analysing the Costs of the ADR Scheme

A critical look at the scheme’s costs reveals significant financial implications.

The annual registration fee of £300, applied to a prudent estimate of 1,000 brokers (from over 1,900 listed), amounted to £300,000 in income for the EO.

Additionally, case fees at £350 for about 600 cases added another £210,000, bringing the total to over half a million pounds.

This setup resulted in a cost of £850 per case. A further FOI request to ascertain the average compensation award was declined by the EO.

However, government consultation documents indicated an average award of just £172 (Recent DESNZ Government consultation on widening ADR December 2023), meaning the total cost of £510,000 for UK Micro business led to compensation totalling only £103,200.

Assessing the ADR Scheme’s Performance

In the summer of 2023, Ofgem provided an update indicating that the ADR scheme had been successful, with almost 300 complaints and a 71% upheld rate, increasing to just under 600 complaints with a 69% uphold rate (recent Ofgem data).

Comparing with Small Claims Track System

Ironically, the small claims track system, which would cost around £100 per case (average issue fee) and includes ADR for free, presents a more cost-effective alternative.

According to the EO, their case handlers can manage about 400 cases annually, equating to an operational cost of approximately £51,000 for two full-time employees.

These costs ultimately get passed back to business owners, as brokers factor these expenses into their rates.

Evaluating Decision-Making Competency

There are concerns about the EO’s compliance with Ofgem’s QDSS criteria, specifically regarding the legal and energy sector training of its staff.

Meetings with ECA members confirmed that such training is not provided, raising doubts about the EO’s ability to assess legal relationships, fiduciary duties, and other essential legal matters effectively.

Ofgem’s Role and the Need for a Rethink

Ofgem’s endorsement of the EO as the only ADR provider, despite a lack of substantive evidence against brokers and a failure to properly calculate the scheme’s cost-benefit, has led to a situation where the scheme’s effectiveness is questioned.

Additionally, Ofgem does not have the authority to certify QDSS schemes, which further complicates their guidance on the matter.

The ECA’s Perspective on ADR Implementation

The ECA supports the idea of ADR but underscores the need for a properly structured and cost-effective approach.

The current scheme’s disproportionate costs and questionable decision-making processes call for a pause and an independent review.

Our Conclusion

The ECA remains committed to advocating for fair, efficient, and effective dispute resolution mechanisms in the energy consultancy sector.

We believe it’s crucial to re-evaluate the current ADR scheme to ensure it serves its intended purpose and benefits all involved parties.

Our focus continues on ensuring that regulatory changes, like the ADR scheme, are made with thorough consideration and tangible benefits for our members and the wider energy community.

What’s next for the ECA?

Here’s what you can look forward to:

  • Informative Workshops and Webinars: Building on the success of our previous sessions, we are planning a series of informative workshops and webinars. These events will cover a range of topics, equipping you with the latest insights and best practices in energy consultancy.
  • Members’ In-Person AGM: We’re excited to announce that our Annual General Meeting (AGM) will be held in person this year. This event will be a fantastic opportunity for networking, sharing ideas, and collectively shaping the future direction of the ECA.
  • Expansion of the Executive Team: To better serve our growing membership and to enhance our advocacy efforts, we’re expanding our executive team. This addition of expertise and leadership will enable us to more effectively represent your interests and drive industry-wide improvements.
  • Showcasing Our Members: Recognising the incredible work our members do, we plan to showcase and promote your achievements to our wider community. This initiative aims to highlight success stories, share best practices, and celebrate the contributions of our members to the energy consultancy sector.

Each of these developments is a step towards strengthening our association and enhancing the value we provide to you, our members. Stay tuned for more details on these exciting opportunities and how you can get involved.

Act Now: Become a Member

The Energy Consultants Association is your advocate for transparency and diligence in the energy industry.

Membership offers direct access to industry intelligence, networking, and a powerful collective voice.

We stand for accuracy and due diligence in the energy consulting sector.

Your participation in our upcoming webinars and ECA membership are vital to ensuring a fair and honest market.

Remember, the more members we have, the stronger our collective voice becomes in shaping the future of our sector.

Together, we can drive positive change and create an environment that supports growth and success for all.

We appreciate your ongoing support and dedication.

Should you have any questions or require further assistance, please don’t hesitate to reach out.

2 Comments

  1. UK Business Energy Broker January 24, 2024 at 6:00 pm - Reply

    Good article highlighting the shortcomings of the EO’s forced ADR Scheme upon all brokers.

    An issue I have raised on multiple occasions with the EO is that a Sole Trader broker is charged the same £300 +VAT as a brokerage with tens or (potentially) hundreds of brokers. A Sole Trader that is (most likely) not VAT registered, would incur a total cost of £360, compared to a much lower cost-per-broker for brokerages with multiple brokers.

    To date, both OFGEM and EO have failed to provide answers to the above. Their excuse in late 2022 was that they didn’t have a clear understanding of the energy broker market. However, that was their excuse a year later, despite having a whole year’s-worth of data.

    The ADR feels like nothing more than an unnecessary tax on brokers, and it is particularly unfair towards Sole Trader brokers.

    https://twitter.com/kWhBroker/status/1543961149582053380

  2. Chris Jones February 13, 2024 at 3:07 pm - Reply

    Absolutely spot on! The lack of differentiation in charges between Sole Trader brokers and larger brokerages within the EO’s forced ADR Scheme is unjust. It’s disheartening that despite ample time, both OFGEM and EO have failed to address this issue and provide a fair resolution. The ADR Scheme appears more like an undue financial burden, especially for Sole Trader brokers who deserve equitable treatment in this matter.

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