Energy Brokers – Solving the Problem with Commission
The commission charged by energy brokers has been a hot topic in the industry for years. The majority of brokers do work on commission and there is nothing wrong with commission as a payment structure. We even work on that basis with some clients if they ask us to do so.
The way that commission is often charged by brokers is what creates a number of issues. Commission fees are often largely invisible to companies. They are negotiated between brokers and suppliers. That means there’s no way for firms to know if they are paying too much for the service that their broker is providing.
It’s for that reason that, whether we work on a fixed fee or a commission basis, we’re always completely transparent about our charges. We believe that transparent charges are key to solving the problem with commission.
The Current Commission Structure
The system of commission currently used by most energy brokers is a confusing and complex one. Energy suppliers pay the brokers, but that cost is actually passed on to the business that employs the broker. All firms who trust a broker with their energy procurement do pay the broker for their service.
Broker’s commission fees are added on to the base rate per unit of energy that the supplier charges a business. This is called ‘supplier uplift.’ This cost is actually covered by the energy user.
The rate of commission added to the supplier’s base rate is negotiated between the supplier and the broker. Rates differ widely and have been known to be anything between 0.05p per kilowatt-hour (kWh) and 5p per kWh. That can make a huge difference to the total cost paid by a business, especially if they have high-energy usage.
As things stand, businesses approach brokers and ask them to find them energy prices. Those brokers then go to suppliers and request prices with a supplier uplift commission fee included. Brokers present those prices – including their commission – to their customers. The commission is not presented separately so businesses are often unaware of how much it is.
That lack of transparency is a real problem. It can confuse businesses into thinking they aren’t paying a commission. It also prevents them from having a true understanding of whether their broker is treating them fairly. Unsurprisingly, Ofgem have felt the need to get involved.
Brokers, Commission & Ofgem
At present, brokers are subject to very little regulation. That means that small businesses have few protections if brokers act improperly.
Ofgem are the body in charge of regulating the energy industry in the UK. They already supply businesses with useful resources advising them how to deal with brokers and TPIs. They recently announced that they would launch a review of the microbusiness energy market in 2019.
That review will examine whether small businesses should be given similar protections to domestic energy users (households). We welcome the action from Ofgem and hope that it does lead to a change in the market. There’s plenty of evidence to suggest that such protections are needed.
The Competition & Markets Authority (CMA) has compiled a number of reports into the energy market in the UK. Those reports have routinely revealed that businesses – especially smaller firms – are consistently overpaying for their utilities.
A report released in 2015 by the CMA had this to say about brokers and other TPIs:
‘we note that a number of complaints have been made to various official bodies concerning alleged TPI malpractice… some TPIs may not have the right incentives to give non-domestic customers the best possible deal. We are concerned that customers are not aware of this and therefore do not take steps to mitigate it.’
The malpractice mentioned by the CMA covers many examples of unscrupulous behaviour. Disreputable TPIs can put undue pressure on firms to sign up to contracts. Those contracts are often drawn up in the best interest of the brokers and not the small businesses themselves.
It’s not just weak regulation, which allows some brokers to get away with this fraudulent behaviour. The nature of the current commission system also gives them free reign to take advantage of their customers.
Solving Problems with Commission
If a broker can set their commission without ever telling a business what that commission is, it creates lots of issues. First of all, it leads to firms mistakenly believing that brokers operate for free or that suppliers cover their costs.
Companies under those illusions can’t make an informed decision about whether a broker’s commission is set at a fair rate. If all parties are aware of the rate of commission, there’s no such issue. Businesses are able to assess the cost of a broker’s service against the returns it delivers.
They can then challenge a broker on their fee or swap brokers if they feel they’re being charged too much. If you need to work out exactly how much you’ve been paying in commission, there’s a handy guide to Finding out exactly how much commission you are paying your Energy Broker.
The current commission system also produces issues aside from the actual commission fee. When brokers negotiate with suppliers and companies are not party to the details, decisions can be made that aren’t in the company’s interests. Long-term contracts are a prime example.
A three-year energy contract locks a company in with one supplier and makes it very tough to switch. That can lead to them paying far more than if they negotiated three different annual contracts back-to-back. Such a contract favours the broker. It ensures that they will get a set commission for the next three years.
That further shows that businesses must be informed of the commission and incentive details agreed as part of their energy contracts. It is only by having that information that they can check that supply contracts are truly suitable for them.
Those are two major examples of problems caused by the current commission system. They each point to the fact that a lack of transparency will always leave firms unable to be sure of their broker’s impartiality. If you don’t know the exact details of the deal a broker agrees, you can’t possibly know whether their aim was to get the best deal for you or for them.
The Bottom Line
The current system of paying commission to energy brokers is rife with issues. It makes it tough for companies to understand exactly what they’re paying and what they get for their money. That leaves the door open for unscrupulous brokers to take advantage of small businesses and line their own pockets.
Transparency of charges has to be the solution. Whether paid as a fixed fee or via commission, charges should be agreed up-front and out in the open. Reputable brokers have nothing to fear from this. Small businesses get all the information they need to make informed decisions.
If you agree and want to speak to a fully qualified utility management account executive that will always be up-front about charges, contact Clifford Talbot today.
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