Select Committee on Public Accounts Appendices to the Minutes of Evidence


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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