Energy brokers – it’s all about the customer relationship

Lawyer Darren Morgan, partner in the Commercial Dispute Resolution team at Leeds-based Blacks Solicitors, discusses the growing momentum of claims against energy brokers in Britain with Smart Energy International.

Energy brokers, the parties who broker tariffs for large energy users, are for most an unknown player in the energy system. Yet they are nevertheless an important one, with about 3,000 brokers practising in Britain for over two million businesses as potential customers of their services.

For the most part, the relationship between the two parties is satisfactory but primarily as a result of the activities of what are popularly known as ‘ambulance chasing lawyers’, i.e. who solicit cases on a ‘no win, no fee’-basis, and the momentum that has resulted, the number of claims has accelerated.

Morgan explains that Blacks was alerted to the issue when approached by a “claims farmer” offering to deliver up to twenty such claims a month for a referral fee and at the same time by a broker who had been served with a claim.

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“It’s all around broker transparency and fully divulging how the brokering service is paid by the energy providers,” he says, commenting that it is reminiscent of similar cases against financial service providers in the late 1990s.

“More and more it is being argued following a single junior court ruling that energy brokers have a ‘fiduciary relationship’ with their clients, i.e. based on good faith, and then the law demands more extensive disclosures of responsibilities and services to the client.”

Typical examples of fiduciary relationships are those between lawyers and their clients and financial advisors and their clients. The duties in such cases include acting in the best interests of the client and not making a ‘secret profit’, with the latter appearing as the springboard to the upturn in the claims against energy brokers.

In this case, a ‘secret profit’ or ‘secret commission’ would be deemed to result if for example, the broker placed a business with a particular energy provider based on its higher commission structure without that disclosure.

Claims against brokers

In terms of the claims, these can be up to any size, potentially into the tens of thousands of pounds for a large energy user if based on a percentage of their usage over a typical three-year agreement term. In practice, many are smaller and below the £10,000 limit and so are dealt with by the small claims court, Morgan says.

In that case, it is then generally most cost effective to settle out of court and he cites a recent case handled by Blacks in which a claim against a broker for slightly under £4,000 was settled for about half that amount.

“In such cases it makes sense to spend that amount to get rid of the problem and manage the risk.”

Accidental or bad practice?

Like any profession, there are undoubtedly some ‘bad apples’ among the brokers, but many believe they are acting with the best of intentions.

Morgan says from his experience that many cases are most likely “accidental” rather than bad practice and a challenge has been the absence of a mandatory code of conduct for brokers, although this has changed with effect from 1 October following licence changes introduced by Ofgem.

He cites the case of a broker client, who for years had been signed up to a code of conduct with one of the big energy suppliers and who had been audited, only soon after to be landed with a claim against him.

“I had to explain that while the code of conduct may provide an information sharing expectation in respect of fees it may not go far enough to satisfy the legal tests for fiduciaries and he became quite disbelieving and shocked at this.”

Broker due diligence

So what sort of due diligence should a company do before contracting with a broker, or to turn it around what actions should a broker undertake when negotiating with a potential client?

Morgan recommends the company should shop around and seek references, while the broker would be “foolish” not to be completely transparent about ties to particular suppliers and whether they have an ‘all sector’ approach to securing their deals.

“Also, brokers should be asked and should disclose the commission they are earning and how it is structured, which could make the contract negotiation more transparent. I also would recommend setting out some sample figures, which would give further transparency.”

Claims

And if a claim is made against a broker, how should it be handled?

Morgan says the claims consultant – increasingly it appears, ex brokers themselves familiar with the potentially shadier practices – send a letter setting out the claim and then a quick decision has to be made as to whether to try to defend or to negotiate a settlement.

“The broker needs to determine if there is enough evidence to demonstrate transparency on the fees and if there is a doubt then that would be the point to contact a lawyer, who should be able to give a percentage chance of success or failure to enable a decision on managing the risk.”

In his experience, almost all cases are settled, including most of those in which the formal litigation process has been started.

Morgan believes that the new code of conduct should go some way, if not fully, to addressing the issue of broker obligations.

“One of the benefits which my clients have welcomed is that the regime is mandatory and it will clean up and bring some certainty and consistency to the sector and by doing so should remove the inadvertent failures on the part of brokers in respect of this quite important element of the relationship with their clients. So I’m hopeful.”