For years, the topic of the commission charged by energy brokers has been at the front of conversation; although there is nothing wrong with commission – the majority of energy brokers earn a commission as their payment structure.
Still, the way commission is charged by brokers has been flawed for a number of years now. Commission fees are often discussed between suppliers and brokers, meaning there is no way for firms to know for certain if they are potentially overpaying for the service a broker is providing, and this leaves a number of issues.
Currently, it is common practice for businesses to approach brokers and ask them to help find the best energy prices. Those brokers are then to go back to suppliers and obtain prices with a supplier uplift commission fee included. Brokers present prices that include their own commissions to their customers and the customer is often unaware that the commission is presented as a part of their price, and therefore not listed as a separate charge. This is why businesses are often in the dark about how much this commission really is, and how much of their payment is being made up from it.
This is a real problem. Today’s system leads businesses into often thinking they aren’t paying commission at all and prevents them from having a full understanding of what is going on with their billing and whether their broker is treating them right.
That is why here at Niccolo, we are encouraging brokers to be more open about commissions and being open with our customers. We are always clear about our charges and believe that transparency in relation to our finances is the crucial point to eradicating these issues with commissions.
Energy brokers have many ways to earn their commission
Energy suppliers pay brokers a commission to bring business to them. There are a few consultancies that charge the client a fee, but these are rare. No-one does it for free.
Typically a broker’s commission is added to the base rate per kWh, or occasionally to the standing charge, that the supplier charges a business, This is known as a “supplier uplift”, the cost of which is to be paid by the energy user.
The suppliers and brokers negotiate the rate of commission added to the base rate, and this varies wildly across the industry, from as little as 0.05p to 5p or even 10p per kilowatt-hour. This not only gives the potential for brokers doing the same job to be making very different money but also can make an astounding difference to what the business pays, especially if they use a lot of energy.
Some suppliers pay this commission upfront, either when the contract is signed, when the contract starts or soon after. For longer contracts, the upfront commission can cover more than 1 years payments. This can lead to issues in the future.
Long term contracts are the perfect example of how brokers have the potential to make decisions that are not in their client’s interest. When brokers working with suppliers do not do what is in the clients best interests, decisions can be made that are directly detrimental to the client’s businesses, such as locking them into contracts over multiple years that has them paying more than they would if they simply negotiated each year separately. These types of contracts directly benefit the broker as in many cases it means that they will get a significant amount of commission upfront.
This is limit the commission that brokers can add to a maximum of 1p and why we do not offer commission upfront, and instead pay it monthly based on our client’s actual consumption.
Brokers, Commission and Ofgem
Today, there is very little regulation for protecting small businesses from brokers who may act in immoral ways. Ofgem (the body in charge of regulating the industry in the UK) already supply businesses with useful resources focusing on how to deal with brokers and TPIs, but did recently comment that they would look to launch a review of the energy market in relation to microbusinesses two years ago in 2019.
That review was to examine whether small businesses should be given the same protections that our households do as domestic energy users.
CMA, The Competition and Markets Authority has gathered a number of reports into the energy market in the UK. The reports, unsurprisingly, led to confirmation that all businesses have the potential to be overpaying for their utilities, though specifically smaller firms.
This quote refers to a number of issues. Some TPIs were even seen to have put firms under pressure to sign with specific contracts, those that are written up with only the brokers best interest in mind, and often leaving small businesses overpaying by hundreds or possibly even thousands of pounds per year – But it is not just the regulation that is weak, and allow for malpractice. Moreover, the nature of our commission system today gives way too many opportunities for brokers to take advantage of their customers.
With such strong evidence to suggest that we need further regulations in place, Niccolo hopes to see changes soon.
Clawbacks
Clawbacks are the name given to the amount of money your broker will be liable to return to the supplier in commission if it is found that you are using significantly less electricity or gas than they had expected in your contract, for example, due to nationwide lockdowns or ceasing in trading. Due to their structure, many large brokers rely on the upfront commissions to pay their sales staff, but when the commission is clawback the salesman has either left to join another broker or has spent the money. This puts significant strain on the brokers.
For example, North Tyneside firm Utilitywise were forced to repay £7.6million to one of the UK’s largest energy companies after their prices were claimed to be largely overestimated. In June of 2017 it was found that the predicted amount of energy used in their contract was too high. The company collapse shortly after in 2019 when they were no longer able to fund their business. Read the full story here.
Because Niccolo doesn’t pay upfront commissions, are brokers don’t have to worry about substantial clawbacks.
What can we do to change this?
Brokers refusing to list their commission as a separate part of their pricing without telling a business creates a number of issues for the client, for example, leading them to believe that the brokers are operating for free, or that the suppliers cover the cost for them. This is incorrect, and companies who do not have this information cannot be expected to make an informed decision about whether or not the commission is set fairly.
If a business was to be aware of the rate of commission, they would be able to consider what broker is right for them alongside the tariff they are looking to sign to, and have a greater opportunity to know when they are overpaying.
If you are concerned about your broker and wondering how much commission they have added to your contracts with other suppliers, we can help you find out.
If you want to know how much commission has been added to your contract with Niccolo, just ask your broker. If they wont tell you, ask us, we will.
Summary
With all of this in mind, we must conclude that the current commission system doesn’t help to determine a broker’s impartiality. Without reform, we will never know if the aim was to benefit clients or simply your broker.
The commission system brings up a number of issues in the energy industry that makes it hard to approach. It makes it hard for companies to understand what they are paying for and what they expect to get for their money, alongside leaving the door open to malpractice where brokers will do all they can to take the money from a business to their own pockets.
Is there a solution?
Being transparent about our charges. Whether a broker is earning a commission or a fixed fee, agreeing on these rates in advance and explaining every facet of where those charges are coming from creates a more open and encouraging environment for everyone involved.
Honest brokers shouldn’t have any complaints about these ideas, and instead, should support all sizes of businesses in fighting to gain access to all of the information, in order to make an informed decision.