Gas and electricity suppliers could face independent checks on their customer service and financial strength under reforms unveiled by the energy watchdog following a spate of recent failures.
Ofgem set out a raft of new rules designed to drive up customer service standards, lower the risk of suppliers going bust and strengthen the safety net in the event of failure.
Its plans would allow the regulator to request audits of a supplier’s customer services operations and financial status, while they could also stop fast-growing providers from taking on new customers if they failed checks ensuring they can effectively serve their customer base.
Management would likewise have to meet “fit and proper” requirements and firms will have to maintain “living wills” to ensure an orderly wind down in the event of collapse as part of the plans.
It comes after more than a dozen energy suppliers have gone bust in the past two years, with Solarplicity one of the most recent casualties.
Ofgem said the surge in new providers entering the market has allowed households to benefit from more competition and cheaper deals.
But it said “as in any competitive market some suppliers may fail to keep up with the pace of more competitive firms”.
It now wants to ensure that if this happens customers are protected and the impact on the wider market is minimised.
The reforms follow Ofgem’s rules brought in over the summer to toughen the entry tests for new energy suppliers.
These now require firms applying for a licence to demonstrate they can adequately fund their operations for their first year.
Mary Starks, executive director of consumers and markets at Ofgem, said: “The new proposals will create more accountability in the market, require more responsible and appropriate behaviour from suppliers in the market and reduce the risk and costs to consumers associated with supplier failure.
“In the event a supplier fails, the changes will also strengthen the ‘safety net’ and improve the experience of customers when they are transferred, so that consumers can be reassured that whatever happens they will be properly protected.”
Ofgem’s plans were welcomed in the industry amid fears that not all providers are trading responsibly and that the cost of mopping up after supplier failures will end up increasing overall customer bills.
Stephen Murray, energy expert at MoneySuperMarket, said the new rules were “not before time”.
He said: “We can’t ignore the cost that supplier failures are putting on the energy market and the existing supplier base.
“Ultimately these costs will wash down into higher customer bills and we have to do all we can to minimise the amount UK households are paying.”
Ofgem said under its plans, fast growing suppliers would be required to meet service standard and operational checks when they hit certain customer number thresholds.
If they fail the checks, they would be stopped from taking on new customers.
The regulator is now consulting on the plans until December 3, with aims to bring in the new rules early next year.