It wasn’t an admission of regulatory failure, more a statement of the bleedin’ obvious, but at least Jonathan Brearley, the chief executive of Ofgem, is finally acknowledging that the rules of the retail energy game require an urgent rewrite. In a speech on Thursday he said the energy regulator would “need to build an energy market that is more resilient to shocks”. You bet.
Ten suppliers have gone bust since the start of August, and nobody expects the tally to end there. Ofgem cannot be expected to run a regime where no company ever collapses, but the costs of the current mopping-up exercise – in other words, forcing bigger companies to accept stranded customers – are ultimately loaded on to everybody’s bills. There should have been a strong obligation on Ofgem to grant licences only to companies with a high degree of financial prudence.
Retail energy supply is, as one insider puts it, the only industry where a company can go from startup to £100m of turnover within a couple of years. All that is required is to be near the top of “best buy” tables until you’ve reached almost 100,000 customers. When the revenue numbers are that large, there are bound to be a few entrants whose have-a-go ambitions are greater than their ability to manage risks.
Ofgem usually protests, as Brearley did again, that it tightened rules in 2019. Well it obviously didn’t tighten enough. Yes, the current surge in wholesale gas prices is unprecedented, but it wasn’t unimaginable. Commodity markets can be wild places.
In the same vein, it was startling to see the previous Ofgem chief executive, Dermot Nolan, admit to the FT last week that he “did not think about a situation where the price cap was the cheapest tariff in the market”, which is today’s position. You’d expect a rigorous modelling exercise back in 2018-19 to have imagined extreme events.
Brearley said Ofgem’s new approach would be more focused on “business models that enter and operate in our energy market and on the risks that they carry”. That’s the easy bit. The trickier part will be the review of the “design and implementation” of the energy price cap.
The government and Ofgem are clearly committed to a cap as a way to protect customers from sudden rises in bills, but something will have to give to allow companies to adapt to sharp swings. Adjusting the level of the cap every quarter instead of every six months is one idea.
The main necessary reform, though, is to Ofgem’s mindset. Switching has clearly delivered benefits to consumers, but the energy regulator never seems to have stopped to ask whether 50 suppliers – or 70, as there once were – made the system as a whole weaker. In the regulatory business, that counts as a basic mistake.
NatWest prosecution was a triumph for FCA, but what next?
There will be relief at the Financial Conduct Authority. Its first criminal prosecution of a financial institution under 2007’s anti-money-laundering laws has been won. NatWest pleaded guilty at the first opportunity at Westminster magistrates court on Thursday in a case involving the bank’s failure to monitor a small jewellery dealer and large cash deposits. Sentencing will follow later.
A triumph for get-tough regulation? Well, yes, but there are still a few unanswered questions here about the FCA’s approach. The positive aspect is that a criminal case, as opposed to the civil route that the regulator has pursued in money laundering cases until now, sends a strong signal. A criminal conviction is seriously embarrassing for a bank and fines can theoretically be unlimited.
In this instance, NatWest could be looking at a penalty of up to £340m – a relative trifle versus some of the cheques written for shenanigans arising out of the 2008 financial crisis, but enough to serve as a wider incentive to banks to invest in systems to prevent and detect financial crimes. NatWest, incidentally, said it had spent almost £700m in the past five years on such kit.
The reservation is that we’re not much wiser as to when, and why, the FCA will take the criminal prosecution path. In a speech in 2019 its enforcement director, Mark Steward, said he thought criminal prosecutions would continue to be “exceptional” and used in cases where there was “strong evidence of egregiously poor systems and controls”.
NatWest’s shocker obviously met the egregious threshold, but so, one would have thought, did several cases in the recent past where the FCA took the civil route. Clarity is required.