APPENDIX 2
REPORT ON SUPPLIERS' DOORSTEP SELLING ACTIVITIES
Copy of a Letter and Report from Ofgem
to the Chairman of the Committee (PAC 2001-02/52)
On 28 February, I gave evidence to your Committee
to discuss the National Audit Office's report "Giving Domestic
Customers a Choice of Electricity Supplier".
2. During the course of the proceedings,
many issues were raised regarding the practices of suppliers'
direct selling agents in the competitive market. You requested
that Ofgem provided a note about the number of prosecutions of
sales agents who had made sales fraudulently.
3. Following the PAC hearing, we wrote to
all domestic suppliers asking them to provide information about
their sales agents, cases of mis-selling and fraud and details
of where action has been taken. We have now had the opportunity
to collate this information and it forms the basis of the attached
report. We have found that while there have been few prosecutions
for fraud, 126 cases were reported to the police in 2000. Disciplinary
action of some form was taken by suppliers against over 5,400
sales agents in the same period. The level of complaints has come
down but Ofgem will be working with the companies to secure further
improvements, in co-operation with energywatch.
4. The attached note hopefully explains
clearly the actions, which we and the industry have taken in relation
to sales agents who mislead consumers.
Callum McCarthy
Chairman of the Gas and Electricity Markets Authority
Chief Executive of Ofgem
9 May 2001
REPORT TO THE PUBLIC ACCOUNTS COMMITTEE REGARDING
"FRAUDULENT" SELLING PRACTICES BY GAS AND ELECTRICITY
SUPPLIERS' AGENTS
INTRODUCTION
On 28 February Ofgem gave evidence to the Public
Accounts Committee (PAC) regarding "Giving Domestic Customers
a Choice of Electricity Supplier". Mr Callum McCarthy, Chief
Executive and Mr John Neilson, Managing Director Customers and
Supply, were the witnesses.
During the course of the proceedings, many issues
were raised regarding the direct selling practices of suppliers'
agents in the competitive market. Mr David Davis, Chairman of
the PAC, raised concerns regarding "fraud" and requested
information on the number of cases of fraud, how many had been
prosecuted and what actions have been taken against individuals.
Mr McCarthy agreed to provide a note to the PAC on this issue.
After the PAC hearing, Ofgem wrote to all domestic
suppliers asking them to provide information about their sales
agents, cases of mis-selling and fraud and details of where action
has been taken. This, and information which Ofgem already uses
(eg complaints statistics collated by energywatch), form the basis
of this report. In addition, we have commented on a number of
issues regarding direct selling which were raised during the course
of the hearings.
REGULATING MIS-SELLING
BY SUPPLIERS'
AGENTS
Most consumers are happy with the approach of
direct selling agents (ie on the doorstep, in public places or
by telephone). Research conducted for Ofgem by MORI published
in January of this year showed that 64 per cent found the sales
and marketing methods used by the supplier satisfactory, only
6 per cent were dissatisfied. As Mr McCarthy outlined during the
hearings, direct selling is the most successful way of getting
the message about savings to consumers, especially disadvantaged
consumers. Recent research by the Electricity Association shows
that sales on the doorstep make up around 67 per cent of all sales,
while sales in public places (ie supermarkets etc) make up 16
per cent and telesales 8 per cent. Given the success of these
sales channels, it is unsurprising that suppliers continue to
market their offers in this way. Research by MORI carried out
for Ofgem shows that doorstep selling is particularly useful for
ensuring that the less well off benefit from the savings which
can be achieved by switching suppliers.
However, it is clearly not acceptable to have
any sales practices occurring where the customer is misled or
defrauded. There is extensive consumer protection legislation
and voluntary agreements in existence which cover this area. We
have provided an Annex to this paper which lists the various regulations
which exist.
For Ofgem, as the regulator of the gas and electricity
supply industries, the most relevant regulations are the direct
selling licence conditions introduced into the supply licences
in 1998. These licence conditions oblige suppliers to ensure the
customer understands that they have entered into a contract; audit
sales contracts, ensure they take up adequate references before
hiring an agent, provide training and ensure that sales agents
carry and use identification, provide on-going management of sales
agents, cancel contracts where requested by the customer, and
provide complaint handling procedures including compensation arrangements.
More detail is provided in the Annex. It is important to note
that these licence obligations cover not only sales carried out
by the supplier itself, but also makes the supplier responsible
for any selling activity carried out for it by third party agencies.
These obligations were strengthened in January 2001.
In addition to these sector specific licence
conditions, there are a number of regulations providing protection
for consumers purchasing from sales agents. These include the
Doorstep Selling Regulations, Distance Selling Regulations, and
the Trade Descriptions Act. Again, details of these are included
in the appendix. These are mainly enforced by the Office of Fair
Trading and local Trading Standards Officers (TSOs).
Finally, the PAC asked about fraud and prosecutions
for fraud. The Forgery and Counterfeiting Act 1981 would appear
to cover circumstances when consumers are misled on the doorstep.
(See Annex.) However, for there to be a successful prosecution
it must be shown that the agent has gained pecuniary advantage
at the expense of the consumer (ie the customer loses out financially).
Since, in the great majority of cases the customer actually is
made better off by signing up to a cheaper deal, prosecutions
are very rare. Some suppliers have taken action against agents
for deceiving them (ie falsely gaining a commission). However,
all suppliers report that the police are rarely interested in
these cases. There are similar issues with agents who commit forgeries.
In all cases, suppliers themselves take action to remove these
agents (or where there have been systematic problems, the agencies)
from their employ.
COMPLAINTS ABOUT
MIS-SELLING,
PROSECUTIONS AND
ACTIONS TAKEN
Ofgem asked suppliers for details on the numbers
of agents against whom complaints have been lodged, actions taken
and prosecutions made. As this information is commercially sensitive,
Ofgem has collated it to give an overall view of the industry.
Suppliers have no common way of recording complaints made to them
so data between suppliers may not be consistent. As Stephen Reid,
Chief Executive of energywatch explained, energywatch will be
collating information on complaints made against suppliers and,
we understand, will be considering common reporting methodologies.
Ofgem recommends that any customer who is unhappy
with the way a sale is made, should contact the supplier concerned
in the first instance to lodge a complaint. All suppliers must
operate a complaints handling and compensation scheme. As outlined
earlier, all suppliers must check that the customer is happy to
go ahead with the sale by sending a letter or telephoning after
the contract has been made. This letter is often headed "welcome
to AB supplier" but its purpose is to identify those customers
who have changed their minds or not understood that they have
entered into a contract early. Consumers only need contact the
supplier, there is no need (unless they want) to go to Citizen
Advice Bureaux or elsewhere. It is a licence requirement to effect
the cancellation. This "audit" is a key feature of the
protection offered by the marketing licence conditions. If a customer
believed that they were "signing for information only",
this letter is an early warning which allows the customer to cancel
quickly.
Complaints to suppliers about direct selling
Ofgem requested suppliers provide us with details
of the number of complaints made to them about their direct selling
activities. At present, there is not a common way of measuring
complaints amongst suppliers (this is something energywatch will
be taking forward). Some suppliers will count all contacts from
customers where there is a dissatisfaction about direct selling
as a complaint even though investigation shows there was no mis-selling.
Often the consumer is complaining about the activity of direct
selling itself not an individual agent's actions.
However, from the data received, it appears
that suppliers receive many contacts from consumers regarding
direct selling. In 1998, around 20,000 contacts were made. In
1999 as the market developed around 25,000 contacts were made
and in 2000, there were over 50,000. This level of consumer contact
must be measured against the high level of direct selling activity
during the past few years with over three million gas transfers
and five million electricity transfers last year. Complaints to
suppliers represent problems with less than 1 per cent of direct
selling contacts.
Over 90 per cent of these complaints appear
to be dealt with by the suppliers satisfactorily with only a small
percentage then complaining to energywatch or similar organisations.
(See below for trends in complaints to energywatch). Ofgem strongly
encourages suppliers to deal with complaints to the satisfaction
of consumers. Suppliers are obliged by licence to have complaints
handling facilities and to provide compensation when appropriate.
Action taken against agents
Suppliers have been active in disciplining agents
who fail to meet the internal standards set by the supplier and
those set out in their licence and other legislation. All of the
most active suppliers operate a points system which allocate points
to an agent based on the number and nature of complaints made.
When certain limits are met, retraining or further disciplinary
action is taken. Disciplinary action of course includes dismissal
for serious breaches or on-going failure to carry out sales properly.
Information provided to Ofgen by suppliers indicates that over
2,000 agents were disciplined in 1998, rising to 4,800 in 1999,
then 5,400 in 2000. Figures to date for 2001 indicate that suppliers
are continuing to take action against agents who bring their companies,
and gas and electricity competition generally, into disrepute.
It must be emphasised that agents do not collect a commission
when the contract is cancelled or the customer is transferred
back to their original supplier following a complaint.
Actions against agencies
In addition to keeping records of an individual
agent's performance, suppliers who use agencies monitor their
performance. Ofgem is aware of suppliers increasingly ensuring
that the agency contracts require standards to be met. Many agencies
have had their contracts cancelled by suppliers for continuing
poor performance. Ofgem does not believe that their employment
of sales agents through agencies necessarily leads to poor performance.
We do believe that suppliers must ensure on-going supervision
of the agencies to ensure best practice standards are met. This
is one of the reasons we introduced a requirement for continuing
management of the sales force into the suppliers' licences earlier
this year.
Actions involving prosecutions by the police or
trading standards departments
Ofgem also requested information from suppliers
about complaints made either by the supplier or by the customer
which involved the police. Suppliers reported that there were
around 10 of these in 1998, 55 in 1999 and 126 in 2000. All suppliers
report that the police are reluctant to take on these cases, although
this does vary throughout the country. Suppliers do refer cases
to the police where sales agents appear to have defrauded them.
This often does not involve consumers, instead these rogue sales
agents sign up vacant (or non-existent) properties in order to
gain a commission. For this reason, Ofgem has encouraged suppliers
to monitor returned post as this can be an indication that this
type of fraudulent behaviour is taking place. Ofgem is concerned
that agents who operate in this way will also be willing to mislead
consumers in pursuit of a commission. Complaint to the police
by suppliers regarding these cases are made under the Theft Act
1968 and the Theft Act 1978.
Trading Standards Officers have successfully
brought prosecutions against Northern Electric under the Trade
Descriptions Act for misleading customers. Northern Electric and
its agency was fined a total of £12,000 plus costs. A more
recent example involved Northamptonshire Trading Standards which
took action against a Mr John Miller under the Forgery and Counterfeiting
Act 1981. Mr Miller had been employed as a sales agent by an agency
working for Amerada. Mr Miller pleaded guilty to 16 counts of
making forged contracts and asked for a further 27 cases to be
taken into account. On 28 March 2001 he was sentenced to 120 hours
Community Service plus £250 costs.
Other cases reported to us by suppliers show
few convictions with most being given community service orders
and/or fines. Suppliers note that the police are under no obligation
to inform them of the outcome of any prosecutions, so information
is incomplete.
Complaints to energywatch/Ofgem
If, after complaining to the supplier, the customer
is not happy with the response or action taken, they can approach
energywatch (previously Ofgem/OFFER and the Gas Consumers Council)
to ask them to investigate. All of these complaints are recorded
by energywatch. Ofgem uses this information to monitor trends
in complaints about marketing and to identify suppliers whose
performance appears to show cause for concern. Customers may also
want to approach other consumer help agencies such as Citizens
Advice Bureaux (CABx) to help them with the difficulties. If in
the course of their work the CABx find evidence of a licence breach
they should provide details to energywatch who can, if necessary,
formally refer the case to Ofgem for enforcement action.
The trend in complaints about marketing are
shown below:
Ofgem uses complaints per 1,000 transfer to
analyse the trend in complaint numbers as it gives a good idea
of the amount of complaints for the amount of market activity.
Similarly, we use this as a basis of comparison between the suppliers
so that those who have larger marketing activities are not unfairly
penalised or those with small marketing teams are not equally
held to account. Ofgem notes that the per 1,000 figure for both
gas and electricity has improved over the last year and hopes
that this will continue in 2001.
ACTION TAKEN
BY OFGEM
In addition to continuing dialogue with all
suppliers regarding their direct selling activities, Ofgem has
taken action with London Electricity regarding fraudulent selling
practices and npower regarding its poor performance. London Electricity's
performance improved markedly over the year which it had undertakings.
Early indications are that npower is taking
serious action following Ofgem's announcement in January that
npower had given undertakings to improve its marketing performance.
npower has considerably tightened its relationship with agencies.
It has also started a programme of proactively auditing the work
of its agents and agencies on the doorstep. We hope to see the
results of this action in the complaints statistics later this
year.
We have also recently started investigating
another supplier whose marketing performance has given cause for
concern.
PROTECTING OLDER
AND VULNERABLE
CONSUMERS
Ofgem shares the concerns which have been expressed
about some forms of direct marketing to older and vulnerable people.
We do not think that pre-warning consumers that a sales team will
be about to enter a vicinity will lessen the potential for those
who exploit vulnerable consumers to use the cover of being "from
the gas board" to trick their way into older people's houses
to commit burglary. (Ofgem is not aware of any genuinely employed
sales agent being involved in any such activity.) All agents must
be properly badged (not just a photocopied logo) as a licence
requirement. If in doubt, older people should not open the door.
We strongly recommend that older people join
their gas and/or electricity supplier's priority customer scheme.
This will give them, amongst other things, a password which they
can use to check whether a caller from their gas or electricity
supplier is genuine. Similarly, all meter readers must be badged
and be able to provide a telephone number where they can check
whether the caller is genuine. This will provide a protection
not only against potentially misleading doorstep sales agents
but also against others out to exploit older people.
The Direct Marketing Association (DMA) operates
the telephone and mail preference schemes which all householders
can join to stop receiving telesales or junk mail respectively.
Ofgem has discussed with the DMA the potential for operating a
doorstep preference scheme so that householders (and perhaps particularly
the more vulnerable) can elect not to get sales agents at their
door. The DMA is interested in this and has reported that it is
currently investigating the practicalities of implementing such
a scheme.
CONCLUSION
Ofgem hopes that this note answers the queries
raised by the Public Accounts Committee hearing on 28 February
2001.
Ofgem will be working closely with energywatch
over the coming year to develop guidance for its consumer advisers,
assist with developing consumer advice and to look at best practice
standards.
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