Ofgem’s Energy Supplier Licensing Review: what’s being planned part 2

Accountability and managerial responsibility

Ofgem hopes that making the initial market entry licencing requirements tougher there will be less energy supply businesses that will ultimately fail.

One of the new proposed changes is the introduction of an ongoing obligation designed to ensure that those with managerial accountability and influence are ‘fit and proper’ for the task.

This will cover anyone (not just employees) who make decisions about or managing the energy suppliers’ activities. This also doesn’t just mean the board and executive team but heads of departments and other managers.  

The drafting suggests that it also aims to regulate the employment of managers who may work in other non-energy supply departments in companies that have a varied portfolio and also dabble in other areas such as telecoms or broadband provision.

Things to consider

Energy suppliers will need to consider a few factors when it comes to their management teams under SLC 4C. Namely, are they fit and proper to lead the business.

Some factors that energy supply businesses will need to factor in include:

·      Does a member of management have a history of misconduct or mismanagement (unlawful or not)?

·      Do any of the management team have a history of insolvency and/or any unspent criminal convictions?

·      Have they ever been disqualified from being a director?

·      Have they been subject to Supplier of Last Resort (SOLR) or any other regulatory actions either against themselves or a business they formerly worked at?

·      Have they previously worked in the energy sector and taken actions that may have resulted in or contributed to consumer or market detriment?

Room for discretion

In the consultation on SLC 4C, Ofgem does state that it is not intended to discourage future employment or detract senior managers from trying to save failing energy suppliers. Instead, the regulator states that it provides suppliers with the option to exercise discretion.

In short, SLC 4C is intended to force energy supply companies to think hard about who they hire and appoint to senior managerial positions, after all, poor leadership is often a major contributing factor to the failure of many businesses.

Some industry experts, however, have raised concerns that senior managers could be punished for actions that they may not be responsible for, as even well-run businesses can, on occasion, inadvertently break regulations.

Unintended consequences? 

One unintended consequence of SLC 4C could lead to discouragement or complications to the early resolution of compliance and enforcement matters, especially if the senior leadership of an energy supply business under investigation fears being criticised and having their future employment prospects put at risk.

Increased openness and cooperation

Tweaks to SLC 5 will introduce the requirement for energy suppliers to be more open and cooperative with Ofgem.

The regulator already incentivises this, but this will change into a requirement to inform Ofgem of any circumstances in which it would need notice in order to carry out its own functions such as taking action to reduce any inconvenience to consumers.

Well run energy suppliers should always be open and provide cooperation with Ofgem already and should demonstrate that it is acting on any issues that are highlighted by the regulator. Demonstrating a proactiveness in addressing issues makes it more likely that they will be more lenient when it comes to enforcement.

One concern over SLC 5A is that if Ofgem determines an energy supplier has not been sufficiently proactive in being open and cooperative, the supplier may be punished. This could lead to some tough internal discussions as to what SLC 5A means in practical terms, for example, what happens when the supplier doesn’t believe that it has not committed a breach but Ofgem takes an opposing view? 

If you’d like to start and manage an energy supply company, get in touch with Dyball Associates today.

In part 3 we will look at the proposals plans for market oversight and the introduction of Customer Supply Continuity plans.

Further Reading

Ofgem’s Supplier Licensing Review: what’s being planned part 1

How does the UK Energy Market work Part 1 – Energy Prices and entering the energy market

How does the UK Energy Market work Part 2 – Tariffs and Energy Billing

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