Ofwat has launched a new consultation on whether new measures are needed to protect customer credit balances in the business retail market.

The regulator is seeking views from stakeholders about the current arrangements for protecting customer money held by retailers in the business retail market and whether it needs to introduce new measures to better protect customers.

Ofwat has launched the consultation to address concerns about whether customers have an appropriate level of awareness of the risk to their credit balances held by retailers, including credit on account for the pre-payment of services and deposits. The issues have been highlighted by the exit of two retailers from the business retail market where Ofwat has been required to use its powers under the Interim Supply Code to transfer affected customers.

The Interim Supply Code sets out arrangements to address circumstances where a retailer is no longer able to provide retail services to its customers, for example where it has exited the market due to insolvency.

Ofwat said that while “market entry and exit can be a sign of a well-functioning market”, the interim supply events had highlighted concerns, commenting:

“In the event of a disorderly retailer exit and insolvency, customer credit balances that are due to non-household customers in the business retail market may be at risk of being partially or wholly forfeited as there is currently no mechanism in place to ensure the recovery (partially or otherwise) of this money. This risks not only customers’ money, but also risks lowering consumer confidence in the market.”

Ofwat’s own research shows that just over 40% of customers  - he majority of which are smaller businesses - are still unaware that they have a choice of retailer and are therefore unaware of the existence of the market. It also shows that smaller businesses are also disproportionately over-represented in the majority of customers that have not engaged with the market, either through switching their retailer or through seeking to renegotiate terms with their existing retailer. Ofwat said:

"Coupled with a lack of awareness of insolvency law, we have concerns that a number of customers may be not be aware that any pre-payments or credit balances retailers hold may be at risk in the event of that retailer becoming insolvent."

The regulator has formed the following possible hypothesis:

“In the business retail market a number of customers are unknowingly placing their money at risk and consequently are not taking appropriate mitigating actions to protect it.”

Ofwat said it now wants to “explore further the extent to which this hypothesis may be valid or indeed whether an alternative hypothesis better reflects the realities of the market at present.”

Ofwat wants plug gaps in its knowledge in a number of areas, including:

• volume of customer credit that may be at risk that retailers hold
• policies that retailers have in place in respect of requiring customers to pay in advance or otherwise lodge credit with them
• information that retailers routinely provide customers in relation to the risk to customers’ credit balances in circumstances such as retailer insolvency.
• policies retailers have in place around the return of credit balances when customers close their account (either because they have switched to another retailer or the account is closed for other reasons)

Possible measures put forward by Ofwat to address the issues include:

• Increasing customer awareness - periodically providing information to customers to make them aware that such credit is normally held on an unsecured basis
• Increased data monitoring - to bring greater clarity around the amount and form of customer credit held by retailers to ensure a focus on its proper management
• Changes to regulations to ensure fair treatment - in cases where retailers are holding significant levels of credit from existing customers, consideration of some form of limit on the amount of credit held
• Forms of insurance for customers’ credit balances - some form of scheme to protect customer balances in the case of a retailer becoming insolvent and exiting the market

Deadline to submit responses to the consultation is 30th April 2021 - click here to access the consultation online.