House of Commons - Public Accounts

Select Committee on Public Accounts Eleventh Report

TACKLING MARKET ABUSES

Doorstep selling

31. Doorstep selling is significant in raising awareness of competition and persuading customers to change supplier. When the domestic gas market was opened up to competition the Gas Consumers Council received complaints about the doorstep selling practices of gas suppliers, so that in January 1998 gas suppliers' licences were modified to include standards for doorstep selling. In the first year of electricity supply competition, however, there were some 4,900 complaints about high pressure or misleading selling practices, or 1.06 complaints per thousand transfers, broadly as in the first year of domestic gas competition.[31]

32. Ofgem said that there was no doubt that doorstep selling had been the most effective means of making people aware of the advantages of competitive choices, especially those on the lowest incomes. They wanted to make sure, however, that it was done honestly, and the best way of doing this was to ensure that the companies managed their workforces effectively. Ofgem had taken advantage of what they had learned in regulating marketing abuses by companies in the domestic gas market, by drawing to the attention of the electricity companies the experience with gas, and imposing licence conditions that reflected their experience of the gas market. These licence conditions had since been extended in a number of ways.[32]

33. Our predecessors asked Ofgem whether they penalised companies who were responsible for marketing abuses. In reply, Ofgem said that they could not impose financial penalties. They named and shamed, and applied licence conditions requiring suppliers to manage their sales force more tightly, with the threat of stopping them marketing if they did not comply. They acted in 1999 against London Electricity and in 2001 against Npower.[33] Ofgem stated that they had seen a very marked improvement in the performance of these two companies. The overall level of complaints had come down markedly. Companies took the effect on their reputation seriously and the threat of naming and shaming had led companies to make changes in the management of their sales force. Ofgem said that the Utilities Act 2000 would give them the power to impose financial penalties and they would welcome the introduction of these as soon as possible.[34]

34. Asked whether prospective customers should be warned that door-to-door sales agents would be visiting their community, energywatch said that it would be valuable to advertise the presence of doorstep sales agents in a particular community.[35] Ofgem did not think that warning consumers would lessen the potential for those who exploited vulnerable consumers to trick their way into people's houses to commit burglary. It was a licence requirement that all agents should be properly badged. They did, however, recommend that older people joined their supplier's priority customer scheme, which would give them, among other things, a password which they could use to check the identity of callers from their existing supplier. Discussions were also taking place with the Direct Marketing Association about the potential for operating a doorstep preference scheme so that householders could elect not to have sales agents calling at their door, and the Association were investigating the practicalities of such a scheme.[36]

35. Ofgem said that they did not know how many prosecutions for fraudulent mis-selling had taken place because they left it to the companies to pursue sales agents who had broken the law.[37] They subsequently reported that there had been relatively few prosecutions for fraud and that 126 cases were reported to the police in 2000. Suppliers had taken disciplinary action of some form against over 5,400 sales agents that had breached their standards in 2000, compared with 2,000 in 1999.[38]

Customer dissatisfaction and complaints

36. Ofgem accepted that the level of complaints had been higher than they would have wished. But it had fallen rapidly, and more so than in the gas market. There were only some 55 complaints a week in December, against a background of 113,000 transfers a week. This was the same level as in the gas market where competition had been in place for two extra years. They did not, however, regard any level of mis-selling as acceptable.[39]

37. Research by the Office of Fair Trading suggests that complaints received by the regulators are the tip of the iceberg, with the true level of customer problems being much higher.[40] Ofgem accepted that the level of dissatisfaction was greater than the number of complaints.[41] There was no common way of measuring complaints and energywatch would be taking this forward.[42]

Involuntary transfers

38. Complaints received by Ofgem about marketing included cases where customers had not understood that they had entered a contract, sometimes having gained the impression that the sales agents were just requesting information.[43] When our predecessors looked at the introduction of competition in the gas market, they were concerned at the anxiety that involuntary transfers due to errors or dishonest marketing could cause to customers, especially the elderly and other potentially vulnerable groups.[44] Of 510,000 electricity customers who had signed contracts to change supplier in March 2000, 4,000 subsequently denied having done so.[45]

39. Energywatch said that their purpose was to work on behalf of consumers as their champion in dealings they had with the suppliers, and that the level of complaints from customers who had changed supplier deeply concerned them. It was an indication that although the competitive market might be helping many consumers, there were others who were not deriving benefits from competition as quickly and as openly as they should.[46]

40. Ofgem said that the level of complaints about erroneous electricity transfers had halved and was running at 1.5 per thousand transfers, equivalent to some 600 a month. Asked whether this fall in complaints gave the full picture, Ofgem said that they did not know about all erroneous transfers, only about complaints made to them and energywatch about such transfers. Ofgem acknowledged that for a transfer to be classified by a company as erroneous, somebody would have had to complain and that the number of people who complained was a fraction of those who had had problems.[47] There were a series of problems with the transfer process, which was inherently complex. Ofgem were undertaking a study of the process which they wanted to clarify and simplify.[48]

41. Energywatch told us that the supplier was the right first port of call in the event of a complaint. If a complaint was not being handled satisfactorily energywatch would want customers to come to them.[49] Energywatch added that mis-selling and erroneous transfers were examples of market failure. They believed that consumers should be able to sign contracts in a standard format so that they would know whether what they were signing for was a contract or for information only.[50] Asked whether it would be useful to introduce an approved standard transfer form, Ofgem said that, rather than requiring every company to use a standard form, they had introduced a licence condition to ensure that every company had an obligation to make clear what was in the contract. It was also important for consumers to understand that it was a contract, and on many companies' forms the word "contract" appeared precisely where the customer had to sign, and also appeared prominently at the top of the form.[51]

Conclusions

42. Although the level of complaints has fallen substantially since competition was introduced, there are still over 55 complaints a week about high pressure or misleading selling techniques against a background of 113,000 transfers a week. Ofgem accept that the level of dissatisfaction will be higher than the number of customers who go to the trouble of complaining, and they do not regard any level of mis-selling as acceptable. While Ofgem can compel companies whose sales agents act improperly to tackle malpractice, they will not be able to penalise such companies until financial penalties provided for in the Utilities Act 2000 come into force. These penalties will provide a stronger incentive to deal with improper practice, and Ofgem should not hesitate to impose them on companies which do not tackle marketing malpractice on the part of their agents.

43. Ofgem are working with the Direct Marketing Association to develop a scheme whereby people can elect not to be approached by sales agents. Energywatch believe that giving advance warning of doorstep sellers operating in an area would also be valuable. In these ways or otherwise, Ofgem need to take early action to protect customers from inappropriate selling techniques.

44. Ofgem rely on suppliers to take action against sales agents who engage in fraudulent activities such as forging customer signatures. Suppliers reported 126 cases to the police in 2000 and took some form of disciplinary action against 5,400 agents, confirming that there is a serious problem. Ofgem should systematically check that suppliers are taking appropriate action against sales agents who fail to meet standards of behaviour.

45. Being transferred to a different supplier without their having given authority can cause considerable inconvenience and anxiety for customers. Ofgem have been receiving complaints about erroneous transfers, which often result from sales agents misleading customers, at a rate of some 600 a month, and acknowledge that many customers transferred in error do not complain to them or energywatch. Ofgem should work with energywatch, who now have responsibility for representing consumer interests, to obtain a much clearer picture of the extent and nature of involuntary transfers, for example by surveying consumers and encouraging customers to raise complaints with energywatch.

46. One problem is that customers may not be aware that they have signed a contract to change supplier. We agree with energywatch that requiring suppliers to use a standard contract format would help make clear to customers what they are signing and would reduce the scope for involuntary transfers. Ofgem told us that many suppliers already use contract forms that make clear to potential customers what they are signing. Ofgem should consider making an approved standard format obligatory.

31 C&AG's Report, paras 3.7, 3.21-3.22 Back

32 Qs 9, 28, 56, 112 Back

33 Qs 11, 36, 73-74 Back

34 Qs 95-98 Back

35 Qs 69-70, 72 Back

36 Evidence, Appendix 2, pp 13-19 Back

37 Qs 115, 117 Back

38 Evidence, Appendix 2, pp 13-19 Back

39 Qs 10, 31, 33, 109, 114 Back

40 C&AG's Report, para 3.24 Back

41 Q22 Back

42 Evidence, Appendix 2, pp 13-19 Back