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Energy cashbacks - why they've been banned and what to do about it


1 January 2014 probably marked the most important part of Ofgem's Retail Market Review (RMR) reforms. From this date 3 key things are supposed to have happened.

Rule 1 - Limiting the number of core tariffs

Suppliers will be limited to having just 4 core tariffs per fuel and per meter type.

Rule 2 - Simplifying and standardising tariff structures

Now all tariffs will only be able to have a single unit rate and a standing charge.

Rule 3 - New rules on discounts, bundles and reward points

More on that below.

What are the new rules on discounts and bundles?

There is a comprehensive set of rules regarding what discounts are, or are not, allowed. Crucially, there can be only 2 types of cash discounts; those for dual fuel and those for online account management. Furthermore those discounts must be applied continuously, they must be applied uniformly across all tariffs, and they must be expressed in the form of £ or pence a year.

Crucially it means that cashbacks are no longer allowed. This applies to cashbacks from suppliers, cashbacks from cashback sites and cashbacks from Third party Intermediaries (such as price comparison websites) and from their affiliates - basically from anyone who directly or indirectly receives a commission payment for executing or facilitating an energy switch with and energy supplier. That pretty much covers everyone selling energy switching contracts.

CASHBACK AND INCENTIVE FAQS

Why have cashbacks been banned?

Because they affect and distort the way consumers make decisions

"Behavioural economics suggests that consumers make inconsistent decisions depending on when monetary rewards are received which has led us to limit the type of discounts allowed."

Source: Ofgem
The Retail Market Review -Implementation of Simpler Tariff Choices and Clearer Information Decision
27 August 2013

But have they really been banned?

Looks like it.

"At the May (2013) workshops we made clear that all cash discounts were prohibited, with the only two exceptions being the dual fuel and online discounts. We also made clear that our definition of discounts would cover any bundles and reward points - ie offers of goods and/or services - provided for free or at a discounted price (non-cash discounts). We explained that the permitted cash discounts would have to be provided on a continuous basis, so that they would not be capable of constituting a termination fee or have a lock-in effect."

Source: Ofgem
The Retail Market Review - Statutory consultation on the RMR domestic proposals Consultation
20 June 2013

Doesn't this just apply to energy suppliers offering cashback?

No. Cashback sites are explicitly banned from offering cashback

"We received one response which outlined concerns over the implication of our rules for cashback models. The specific circumstance referred to was a cashback model that was not in the form of a direct discount, nor a bill deduction over time but a payment from the cashback companies paid directly into the customer's chosen bank or Paypal account. As this is a cash discount, linked to the energy supply contact, and the customer receives it as a result of taking up the supply contract, we believe that this cashback reward will still impact the customer's decision and is therefore not permissible under our rules."

Source: Ofgem
The Retail Market Review -Implementation of Simpler Tariff Choices and Clearer Information Decision
27 August 2013

Price comparison sites and any representative of an energy supplier are also currently banned from offering cashback.

"On cash discounts: We consider cashback to be a cash discount and therefore supplier representatives will not be allowed to offer cashback. This applies to any supplier representative, such as a TPI (Third Party Intermediary), who offers cashback to consumers who use their services to purchase or switch gas and electricity tariffs."

Source: Ofgem
Open letter - Retail Market Review: application of rules in the TPI sector
19 December 2013

Who is responsible for ensuring compliance with the rules?

The energy suppliers

"One supplier requested that Ofgem make clear that representatives will have to comply with our RMR rules during a sales process as well as suppliers. We can reiterate that representatives will need to comply with our RMR rules and that suppliers have a responsibility to ensure their representatives are compliant."

"As mentioned above, it is for suppliers to ensure that their representatives comply with these rules."

Source: Ofgem
The Retail Market Review -Implementation of Simpler Tariff Choices and Clearer Information Decision
27 August 2013

What about vouchers and other incentives?

There is a little more flexibility here (but also a little more confusion). In essence a voucher or incentive can be offered provided that;

- it does not have a lock-in effect

- it complies with the rules on discounts and bundles and

- (most importantly) it must be made available to all customers who are on the tariff to which the incentive is applied.

"This means that, if a suppler offers a bundle as part of a tariff, any customer that has access to that tariff must also have access to the bundle."

Source: Ofgem
The Retail Market Review - Statutory consultation on the RMR domestic proposals Consultation
20 June 2013

"On bundled products: Our requirement that bundled products be available to new and existing customers has the effect of mandating that these products must be offered through all the marketing channels that a supplier chooses to use (including price comparison/switching sites). As a supplier is required to take all reasonable steps to ensure that its representatives abide by the rules on bundled products, a switching site, for example, cannot offer a bundled product independently of other marketing channels used by that particular supplier. In effect, consumers must be able to obtain that bundled product irrespective of the medium through which they engage."

Source: Ofgem
Open letter - Retail Market Review: application of rules in the TPI sector
19 December 2013

So if there are breaches what happens next?

Ofgem has previously indicated that it will take a tough stance on enforcing the new rules but we don't yet know what that means.

"We would like to make it clear that we would consider the use of derogations in only very limited circumstances."

Source: Ofgem
The Retail Market Review -Implementation of Simpler Tariff Choices and Clearer Information Decision
27 August 2013

What does it all mean?

That's a very good question? It will be interesting to see how Ofgem handles breaches of the new rules in the early days. Any signs of dithering would be seen as a sign of weakness by Ofgem with the clear risk that energy suppliers and their representatives will not take the new rules seriously. It is one to watch closely.

What are the implications for consumers?

If you see an offer with a tariff that you are already on, such as a cashback or an Oleg meerkat toy, then take a record (for example a screenshot). Our (TheEnergyShop.com) interpretation of the rules is that you too should be entitled to get the same incentive. Send the screenshot to your energy supplier (they are ultimately responsible for applying the RMR rules) and ask them to refund you the cashback (or send you the toy) as applicable. That's what the rules imply so it has got to be worth a try.