The regulator, OFGEM, has brought in new rules requiring energy suppliers to undergo financial stress testing to prove their resilience and reveal any weaknesses. Directors and major shareholders of companies applying for a licence, as well as senior managers, have to show they are ‘fit and proper’ to hold a licence.
OFGEM’s is responding to the string of energy supplier collapses we have seen in recent months amid soaring energy price rises. In June they took action under the new rules for the first time against the supplier UK Energy Incubator Hub Ltd. It issued the firm with three separate Provisional Orders requiring them to immediately provide financial and managerial information and engage with OFGEM in a constructive manner, or risk having its licence revoked. In July OFGEM issued a Final Order requiring the supplier to remove a senior individual from a position of significant management responsibility or influence. A couple of weeks later OFGEM appointed Octopus Energy to take over the firm’s 3,000 domestic customers.
So, clearly these new rules around the ‘fit and proper’ test are something energy companies to be aware of to avoid to protect their licence. In particular, one of the key issues is around the recruitment of any person with ‘Significant Managerial Responsibility or Influence’, so-called SMRI’s. On that, OFGEM’s Guidance spells out a wide definition.
Paragraph 4.84 “We consider that persons with significant managerial responsibility or influence may include directly employed staff or certain advisors or consultants which have effective decision-making authority. For a supply business, persons with significant managerial responsibility or influence may include (but may not be limited to) any head of a business area including finance, risk, operations, technology, data, compliance, and heads of business functions, head of trading or hedging, strategy, marketing and customer relationship management.”
So, firms need to share information with OFGEM about the potential appointment of anyone who fits that description. But how does that impact the recruitment process? At what stage should information be shared? OFGEM leaves that for firms to decide.
Lucy Townley is one of our team of lawyers advising clients in this sector and she joined me from Edinburgh to discuss it. I started by asking how this came about:
Lucy Townley: “It has come about given all of the focus on the energy markets at the moment and it is an attempt by OFGEM to try to improve the way that energy markets are functioning. So, the intention is that anyone with significant control within a business, or significant managerial positions, will be assessed by OFGEM before taking on new roles so that OFGEM have some control over who's involved in running those energy businesses. So they've introduced a new test, or new reporting requirement, that mean that energy providers have to provide information to OFGEM before making or before, crucially, firming up any offers that they may be considering making to people with significant managerial control.”
Joe Glavina: “Thinking about the recruitment process, should firms that are considering a number of people for a particular job first make contact with OFGEM and run it past them?”
Lucy Townley: “It's an interesting question, I suppose that's the most risk averse approach to ensure that you're providing OFGEM with lots of information about the people you're considering. We probably wouldn't recommend that because it's a huge amount of work for businesses and for OFGEM to screen all of those people and to run the necessary assessments. Additionally, those people may not want to have their information passed to OFGEM repeatedly for perhaps different positions they're applying for. So I don't think it's important to do it for everybody, and certainly not at the initial stages of recruitment.”
Joe Glavina: “So just moving on to the offer. How about checking in with OFGEM before making the job offer?”
Lucy Townley: “Again, it's another good idea and it's certainly something that businesses could look to do, and I think there are some benefits for doing that, to prevent you getting to final offer stage and then finding out that OFGEM don't deem that person to be ‘fit and proper’. Again, it increases the workload on the HR teams and on OFGEM to screen multiple people, so if you've got the ability, the time, the cost, to do that then I think it's not necessarily something you shouldn't do, but I'm not sure it's necessary and it's an increase in the workload, I would say.”
Joe Glavina: “How about making a conditional offer to your best candidate and then running it past OFGEM before deciding whether to make it definite offer?”
Lucy Townley: “Yes, I think that would be my preferred approach. I guess that’s what we tend to see in lots of industries and it's quite standard in the recruitment process. So you'd quite often make a conditional offer to candidates that is, perhaps, dependent on references, or proving that they've got the necessary qualifications to undertake a role. So I think that makes sense in this case. What's interesting is that the requirements that OFGEM have identified specifically say that you must notify OFGEM of the people's information before finalising an offer of recruitment. So we've got no idea yet what that looks like for OFGEM, whether they think a conditional offer is going too far down the process before getting them involved, but we think at this stage that that's probably a sensible approach. I suppose what I would say in relation to that is that by the time you get to that stage, that candidate will be more than willing, I expect, to provide you with all the necessary information and to provide that to OFGEM, so I think that's a sensible thing to do. Further, I think it makes a lot of sense to reduce the workload on the businesses when you're going through the recruitment process. One of the concerns that we would probably have, in that respect, is what you're going to do if you get that far down the process, you've already told the unsuccessful candidates that they've not been successful, and then OFGEM deem that your preferred candidate isn't fit and proper. There is a risk in that case that you've, perhaps, missed your second-best candidate and you would need to think carefully about that but I would imagine, in the majority of cases, if the business has deemed someone to be fit and proper I think it's unlikely that OFGEM would come to a different conclusion. So yes, I think in conclusion, that is the best approach, Joe.”
A good summary of OFGEM’s new tougher rules is in their press release of 20 June. They explain why they have been introduced and what they expect from firms and provide links to guidance all their relevant publications. We have put a link to that in the transcript of this programme.
- Link to OFGEM press release about tougher measures affecting energy suppliers