Vulnerability and Essential Services

Abstract

This paper discusses the development of vulnerability policy in essential services in the UK, the position at present and what the future holds.

This paper discusses the development of vulnerability¹ policy in essential services in the UK, the position at present and what the future holds. The creation of vulnerability policies by the regulators of essential services has been an important change of approach to consumers which has only developed over roughly the last decade. There has also been significant academic interest in vulnerability at a conceptual level ranging from philosophy to sociology to marketing as well as other contexts (Gilson 2014; Goodin 1986; Hamilton et al. 2016; Mackenzie et al. 2013; Menzel Baker et al. 2005; Misztal 2011; Turner 2006). The most influential legal analyst has been Martha Fineman (Fineman 2008, 2010, 2013, 2017).² Her approach is largely a conceptual investigation of the notion of vulnerability, teasing out its nuances and making suggestions as to the implication of applying vulnerability as a new heuristic category. A crude summary of her approach would be that vulnerability needs to be seen as something which is both inherent and context dependent, potentially long-term, or transient and which may have multiple drivers. Because of the potential universality of vulnerability, identifying vulnerable groups is problematic and potentially stigmatising. A much better approach is to identify people (or consumers for present purposes) who are in or subject to vulnerable circumstances.

Her investigations do not lead her to looking at how this concept could be operationalized and are also very focused on the American experience. There are few pieces of academic work which examine the concept of vulnerability in specific areas related to consumers (although see Cartwright 2015; Riefer & Saintier 2020 and Waddington 2013), although Herring (2016) has attempted an ambitious reconstruction (see also Dunn et al. 2008; Furusho 2016; Grear 2010 and Stychin 2012 in different areas).

This piece examines an area where there has been major policy development on the basis of a recognition of consumer vulnerability and little academic work (although see Dodsworth 2020). This provides a description of how the concept discussed in the academic literature could be operationalized (although there is no evidence that the regulators were influenced by the academic literature). Unlike Fineman’s suggestion that vulnerability should be addressed by the responsive state, in this area the regulators are attempting to encourage private companies to address vulnerability issues. Why this should be so depends on understanding the context of essential services in the UK.

First, what are essential services? For my purposes: energy, water, communications, and financial services. Access to the products of these industries is recogniszd as critical to the ability of people to be able to participate properly in a modern society. Access to water is self-evident, to the point that it has been recognized as a right by the United Nations.³ Energy follows close behind as everyone needs to heat or cool their property as well as using electricity to power appliances and access communications. Access to communication services is essential in a modern world where the default provision of private or public services is digital. Much social interaction now takes place digitally, through networks such as Facebook, Instagram, and TikTok. Although financial services may be seen as different, certain financial services are essential. It is very difficult to operate in a modern society without a bank account and the associated services and certain types of insurance are compulsory.

The industries have some important similarities and differences. Three of them, energy, water, and communications, were nationalized monopoly industries in the UK until their privatization in the late 1980s and subsequent opening to competition. Financial services have always been based in the private sector although the impact of competition was muted through regulatory arrangements, which were liberalized in the 1980s. Three of these industries are competitive, with water being the exception, which has made a difference to the development of policy for the water industry. Although energy and financial services are competitive industries in the UK, competition is weak in energy and also in retail banking. The communications industry is more competitive, although the UK mobile telecommunications market has four main players and social networking is dominated by a couple of big players, notably Facebook and Google. That brings up a final point: Outside financial services these industries are network industries. That is, the provision of services to the consumer is reliant on a network to provide those services. “Pipes and wires” in the context of traditional utilities. In economic terms, these networks are natural monopolies, which mean that there is no economic point in having competition between the networks.

The UK therefore has a private sector model for the delivery of essential services in the context of weak market competition. The political bargain for moving away from nationalized industries (although this is not true of financial services) to this model was to create four independent regulators now called: the Office of Gas and Electricity Markets (Ofgem), the Office of Water Services (Ofwat), the Office of Communications (Ofcom), and the Financial Conduct Authority (FCA). The regulators all have a statutory basis and have been given a variety of duties and objectives which have become more complicated over time. The focus of these duties is on what can be conceived of as economic regulation: Price control is the centrepiece of water regulation as would be expected in a monopolistic industry and it has been a central part of energy regulation since 2018.

The other main aspect of regulation is ensuring companies follow their licence and authorization conditions. Companies cannot operate in these industries without adhering to conditions which are legally enforceable by the regulator. In terms of relationships with consumers, these range from the very detailed ones of the FCA to the less detailed requirements of Ofgem. The regulators have powers to enforce these conditions, which may include levying civil penalties, as well as concurrent powers under competition legislation.⁴

Historically, the regulators have had some responsibility for “social” obligations, such as access to supply, disconnection, and debt policy, although this has often been seen as secondary to their main operations. Perhaps as part of this, they are required to take into account interests of certain groups of consumers and others. This includes consumers on low incomes, suffering from disability and chronic sickness and underpins the development of vulnerability policy discussed later.

Although the regulators have been given a large measure of autonomy in making decisions, there is an unclear dividing line between what is regulators’ responsibility and what is for government. Although governments have never formally directed regulators as to outcomes, there are examples of informal pressure, notably in relation to energy prices and there is a clear expectation that regulators work within government strategy. There are supposed to be statements of government strategy for three of these areas, but this framework has not worked very well. There has not been such a statement in energy since 2013, although one was promised in 2021 (Department for Business, Energy and Industrial Strategy BEIS 2020, at 86) and is due in 2023 (Department for Energy Security and Net Zero 2023b), and in telecommunications the current strategic priorities date from 2019 (Department for Culture, Media and Sport (DCMS) 2019). A statement for water was issued in March 2022 (Department for Environment, Food and Rural Affairs (DEFRA) 2022a). There is no provision for a strategy and policy statement in relation to the FCA although the Treasury may make recommendations to the FCA about aspects of government economic policy which the FCA should have regard to when considering how to meet its statutory objectives and powers.⁵

So, there is space here for regulators to develop consumer policy, although it is clear that the regulators’ role is not to engage in redistributive social policy and they do not have the legal powers to do so.⁶ This is seen to be the domain of governments and is stated in the early versions of the strategy and policy statements (Ofgem 2011a, para 22). This point is so well understood that it very rarely surfaces in any public debates.

Vulnerability Policy—Development

The starting point for vulnerability policy came in the energy sector. Although there were separate regulators for electricity and gas after privatization, the two regulators were merged in 2000 to form Ofgem with more emphasis being put on social, rather than purely economic, matters. Ofgem then developed a Social Action Plan which was aimed at tackling fuel poverty. By 2005, this had become a Social Action Strategy which, although still highlighting the importance of fuel poverty, now seemed to focus more on vulnerable customers (Ofgem 2005, at para 1.8). The strategy focused on four areas of work (Ofgem 2005, at 1):

• The [companies] need to comply with regulatory obligations

• Encouraging best practice among energy suppliers

• Influencing the debate about the best measures to help tackle fuel poverty

• How to best inform consumers about ways to lower energy bills

Ofgem had committed itself to a review of the Social Action Strategy in 2010 and seems to have begun this review around 2011. At this point, one of the themes coming out from the Energy Supply Probe and the Retail Market Review (Ofgem 2008, 2011b) was that there were certain types of consumers who were less likely to benefit from a competitive market. Given this information, there seems to have been a widespread feeling that Ofgem should take a different, wider, approach to social issues. Ofgem consulted widely on this issue over the course of 2011 and 2012 and developed a vulnerability strategy going beyond the groups explicitly mentioned in the legislation. Ofgem felt able to do this because although required to have regard to the interests of certain groups of consumers, the legislation added that regard may also be had to other types of consumers.

Ofgem was thus the first regulator in the UK to create a consumer vulnerability strategy (Ofgem 2013). The strategy describes how the regulator defines and approaches the complex issue of vulnerability. Its objective is to protect and empower consumers in vulnerable situations in the energy market and to ensure equality of access to market benefits. Consumers should not be at a disadvantage because of their situation. Rather than relying on a list of assumed “vulnerable groups,” the strategy is based on a broad understanding of the range of contributory factors: Ofgem’s approach was based on looking at risk factors that contribute to vulnerability which stem from personal circumstances as well as from the energy market itself:

“Consumer vulnerability also recognises that vulnerability can be complex, multidimensional and transitory. Vulnerability is not just about an individual; the market can cause or exacerbate vulnerability, and different consumers may be vulnerable in different situations.” (Ofgem 2013, at 6)

While recognising that any consumer can face detriment in a market, Ofgem’s work under the strategy focuses on those consumers in vulnerable situations who are most in need of protection or support. Vulnerability was defined as when consumer’s personal circumstances and characteristics combine with aspects of the market to create situations where he or she is:

• significantly less able than a typical consumer to protect or represent his or her interests in the energy market

• and/or significantly more likely than a typical consumer to suffer detriment, or that detriment is likely to be more substantial (Ofgem 2013, at 12).

The strategy recognizes that the causes of vulnerability are complex and multidimensional, and that vulnerability can be transitory, ongoing, or long-term.

Ofgem’s vulnerability strategy was the catalyst for an explosion of interest and policy development amongst other regulators and the relevant industries. The next major development was research by the FCA which resulted in the publication of a paper (“the FCA paper”) with the intention of broadening the understanding and stimulating interest and debate around vulnerability, as well as providing a number of practical resources (Financial Conduct Authority (FCA) 2015). Although modestly titled, the FCA paper represented a major change in the Authority’s thinking, given that it did not have any explicit statutory responsibilities for specific groups.

The financial services industry has always been a competitive, private sector-owned industry, albeit firms are now required to obtain authorization, and the FCA’s remit extends to tens of thousands of firms. The FCA’s strategic objective is to make sure that the market functions well and it has a number of specific objectives which include consumer protection.⁷ Although no mention is made of specific groups of consumers within the legislation, it does provide that, when the FCA is considering what constitutes an appropriate level of consumer protection, it must have regard to the differing degrees of experience and expertise that different consumers may have.⁸ In addition, those providing financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question.⁹

The FCA paper takes the approach that vulnerability is a broad concept which can affect any person. It can be caused by long-term characteristics such as disability or by short-term circumstances such as job loss (Financial Conduct Authority (FCA) 2015, at 17). In formal terms, the FCA paper’s definition is:

“A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.” (Financial Conduct Authority (FCA) 2015, at 20)

A change of circumstances leading to financial shock is particularly important in the context of the financial services industry. A significant point made in the FCA paper is that “A key element of vulnerability that needs to be recognized is the part that market practices play in contributing to vulnerability and often in crystallising risk into real detriment” (Financial Conduct Authority (FCA) 2015, at 20). The FCA paper further goes on to say that a risk factor approach is useful when thinking about a vulnerability strategy:

“Risk factors are useful in that they capture not only the varied and fluctuating nature of vulnerability, but they also cover the interaction between the individual and the service provider. Identifying risk factors reduces the need to categorise or stereotype groups.” (Financial Conduct Authority (FCA) 2015, at 22)

It is emphasized that an unexpected change in circumstances is common for individuals and that this may have important effects in relation to their financial services. Most of the FCA paper is devoted to an examination of the issues that may arise for firms and suggestions for tackling the issue of vulnerability. It points out that the FCA has regulatory rules and principles that bear on customers in vulnerable circumstances with the implication that, if firms do not take vulnerability into account in an appropriate manner, the FCA may find them in breach of regulatory rules and principles.

The last industry regulator to address vulnerability issues explicitly in a policy paper was Ofwat. Ofwat took a similar approach to the FCA through producing a report (“the Ofwat paper”) which aimed to broaden the understanding of vulnerability in the water industry and stimulate debate (Ofwat 2016). Ofwat operates under similar legal provisions to those of Ofgem as regards a list of vulnerable consumer groups.¹⁰ The Ofwat paper recognizes that this definition is restrictive and narrow; therefore, Ofwat decided to take a wider approach to vulnerability (Ofwat 2016, at 7). Ofwat took the view that there needed to be a broad definition of vulnerability which considered the circumstances faced by people, as well as their personal characteristics and recognized that vulnerability was dynamic, being both short- and long-term (Ofwat 2016, at 19). Importantly, Ofwat also recognized that vulnerability was a loaded term and that customers did not want to be labelled as vulnerable. They therefore preferred to talk about customers in circumstances that make them vulnerable or situations of vulnerability. This led them to the following definition:

“A customer who due to personal characteristics, their overall life situation or due to broader market and economic factors, is not having reasonable opportunity to access and receive an inclusive service which may have a detrimental impact on their health, wellbeing or finances.” (Ofwat 2016, at 20)

Having established a definition, the Ofwat paper then goes onto to consider how consumers in vulnerable situations should be identified, including barriers to identifying them and how to support customers in vulnerable circumstances. In other words, this is an attempt to help companies think about their approaches. Particularly interesting is the recognition in the paper that there may be several “triggers” which help in identifying potential vulnerability, which is not exclusive (Ofwat 2016, at 23). In other words, this is a multi-factorial approach.

Moving to Enforceability

The next stage in development has been to make these principles enforceable and this started with the communications regulator, Ofcom, who took a different approach to the issue of vulnerability from Ofgem, Ofwat, and the FCA. Rather than developing a policy statement or issuing a research paper, it addressed the issue as part of its review of the General Conditions for communications providers. Ofcom’s main legal duties are to further the interests of citizens and consumers in communications matters, the latter by promoting competition where appropriate.¹¹ When performing those duties, Ofcom is to have regard to, among other things, the needs of persons with disabilities, of the elderly, and of those on low incomes and the vulnerability of children and others whose circumstances appear in need of special protection.¹² Although the General Conditions included provisions in relation to consumers with disabilities, Ofcom felt that there should also be provision for consumers whose circumstances, such as illness or bereavement, made them vulnerable. They had also received complaints that communications providers had failed to consider the needs of vulnerable consumers and there was pressure from a number of respondents to focus on the needs of those consumers in vulnerable circumstances (Ofcom 2016, at para 9.6, Ofcom 2017, at para 12.2).

Ofcom’s response was to create a new condition in the General Conditions dealing with measures to meet the needs of vulnerable consumers and end-users with disabilities.¹³ The provisions require communications providers to establish clear and effective policies for consumers whose circumstances may make them vulnerable. Vulnerable circumstances mean circumstances such as age, physical or learning disability, physical or mental illness, low literacy, communications difficulties, or changes in circumstances such as bereavement.¹⁴ The policies should cover how information is recorded and how consumers in vulnerable circumstances should contact their provider, as well as the review of those policies. Staff should be aware of the policies and receive appropriate training. The Ofcom conditions focus on consumers’ circumstances, as opposed to recognising that external factors, such as market conditions or company policies may be a cause of vulnerability. The amendments were followed by a guide for companies in 2020 (Ofcom 2020).

Ofgem has also introduced a vulnerability principle into the suppliers’ licence conditions. This was part of a wider move, following the Competition and Markets Authority (CMA) report (Competition and Markets Authority 2016), to ensure that the principles-based regulatory approach that Ofgem sought to apply was fit for purpose. Ofgem argued that treating customers fairly might mean that they needed to be treated differently depending on their circumstances. This was particularly the case with customers in vulnerable circumstances, where being treated fairly would require special consideration and extra effort from suppliers (Ofgem 2017, at para 3.2). The object was to clarify the outcomes that Ofgem expected.

After a consultation process, Ofgem amended and re-ordered the standard supplier licence conditions. The first condition has the objective of ensuring that all domestic customers, including those in vulnerable situations, are treated fairly.¹⁵ An action in relation to a customer is not fair if it would give rise to a likelihood of detriment, unless the detriment is reasonable in all the relevant circumstances.¹⁶ This is followed by several general standards of conduct which deal with suppliers’ behaviour, the provisions of information, customer service arrangements, and the treatment of customers in vulnerable situations. Regarding this last point, suppliers must seek to identify customers in a vulnerable situation in an effective and appropriate manner and apply the standards of conduct which considers the vulnerable situation a domestic customer may be in.¹⁷

A vulnerable situation is defined as meaning:

“ … the personal circumstances and characteristics of each Domestic Customer create a situation where he or she is:

• (a) significantly less able than a typical Domestic Customer to protect or represent his or her interests; and/or

• (b) significantly more likely than a typical Domestic Customer to suffer detriment or that detriment is likely to be more substantial.”¹⁸

Like Ofcom, this definition of vulnerable circumstances focuses on the characteristics of the customer, with no mention of external factors, although they might be considered in terms of their relationship to the customer’s characteristics. Again, like Ofcom, little guidance is given as to what is expected in terms of policies and procedures of the suppliers with the focus being on outcomes.

This policy was picked up very strongly in the energy industry, with Energy UK sponsoring a Commission on Consumers in Vulnerable Circumstances which has led to a Vulnerability Commitment supported by fourteen suppliers, about 90% of the domestic retail market (Energy UK 2023).

Finally, Ofwat went further, asking water companies to address vulnerability issues in the business plans that they submitted for the 2019 Price Review (PR19). Affordability is seen by Ofwat as a separate issue to be addressed by the companies (Ofwat 2017, Chapter 3). Addressing vulnerability does not, therefore, cover financial support. Companies were required to report on six common metrics: the percentage of customers aware of the availability of non-financial assistance, the number of customers on special assistance/priority service registers, the percentage of customers on these registers, the take-up of services available through these registers, the percentage of customers who are satisfied that the services are easy to access, and the percentage of customers on the registers contacted over the last 2 years to ensure that they are still receiving appropriate support (Ofwat 2017; Appendix 1). In addition, companies were required to include one bespoke performance commitment on vulnerability that reflects the specific challenges in their business plans. Going forward, Ofwat is considering the establishment of third-party expert panels and the further development of common metrics in the period 2020–2025. After initial assessment of the companies’ business plans, Ofwat proposed a common performance commitment on vulnerability focusing on increasing the reach and accuracy of priority service registers (Ofwat 2019a; Annex 2). In terms of giving companies incentives to do well, company plans which are rated as exceptional or fast-track received financial benefits in terms of an increase on their return on equity as well as procedural benefits in terms of receiving faster and less interventionist decisions (Ofwat 2017, at 245). Ofwat also claimed that there will be reputational benefits for these companies. Companies whose plans require significant scrutiny faced a slower decision-making process and more intervention from Ofwat.¹⁹ In addition, their cost-sharing rates will be reduced and there may be a cap on payments for outperformance on outcome delivery incentives (Ofwat 2017, at 248). So, although vulnerability and affordability are only a part of water company business plans, this structure provided incentives which will encourage them to address the issues seriously.

Unlike the other three regulators, the FCA has not explicitly incorporated rules about the treatment of consumers in vulnerable circumstances into its rules. It has instead issued guidance for firms on the fair treatment of customers in vulnerable circumstances (Financial Conducts Authority (FCA) 2021). The idea behind this is that firms are required to treat customers with the appropriate degree of care but that what is appropriate for customers in vulnerable circumstances may be different and that firms should ensure that such customers are treated fairly. What this might entail is explained at some length in the guidance, but it includes having the means to identify customers in vulnerable circumstances, understanding their situation, having properly trained staff, taking appropriate actions, and monitoring a firm’s behaviour in this area.

Although the Guidance does not create any new rules or require mandatory action, there is an implication that if firms do not take the actions envisaged in the Guidance or fail to uphold their own policies in relation to customers in vulnerable circumstances, this may lead the FCA to find a breach of the existing rules and principles. As an example, although it pre-dates the Guidance, the FCA fined Barclays £26 million for failures in their treatment of consumer credit customers who fell into arrears or experience financial difficulties (Financial Conduct Authority (FCA) 2020). One of the issues behind this enforcement action was that vulnerable customers were not being identified and supported.

From July 2023, the FCA will be introducing a new Consumer Duty (Financial Conduct Authority (FCA) 2022a and Financial Conduct Authority (FCA) 2022b) through the introduction of a new Principle 12 in its Handbook which will state that: “A firm must act to deliver good outcomes for retail customers.” This is underpinned by three cross-cutting obligations and four consumer outcomes. The three cross-cutting obligations are that firms must act in good faith, must avoid causing foreseeable harm to retail customers, and must enable and support retail customers to pursue their financial objectives. The outcomes that the FCA are aiming for are that the products are to be designed to be fit for purpose, that they should offer fair value, firms must support retail customer understanding in their communications and provide a level of support that meets consumer needs through this process.

Although this is cast as a general Consumer Duty, the FCA sees this as a way of building on its work to improve outcomes for consumers in vulnerable circumstances. It does this by seeking to ensure, in various contexts, that firms take into account the characteristics of vulnerability. For example, under the cross-cutting principles, acting in good faith means not taking advantage of characteristics of vulnerability which would cause the consumer detriment (2A.2.3(c )). As another example, a manufacturer’s product approval processes must take account of any particular additional or different needs, characteristics, and objectives that might be relevant for retail customers in the target market with characteristics of vulnerability (2A.3.4 R (2)). To put the point more generally, the need to take into account the characteristics of vulnerability that consumers may have is woven into the requirements of the Consumer Duty and the requirements of the Consumer Duty are expected to be embedded into a firm’s practice and governance arrangements. These obligations are enforceable by the FCA.

Key Points

All the regulators have adopted a wide definition of vulnerability and there is some recognition that company policies or procedures can cause vulnerability. The regulators recognize that it is company policy and actions which will deliver, or not, better outcomes for consumers in vulnerable circumstances. The regulators do not see their role as prescribing how companies do this. Instead, they identify a number of things that need to be done, for example, companies should have procedures which allow them to identify when customers are in vulnerable circumstances.

The National Audit Office was sceptical about the success of vulnerability policies in 2017 (National Audit Office 2017). Some of the issues that they identified were that: The respective responsibilities of the regulators and government were not sufficiently clear, that the high level aims of the regulators had not been translated into detailed objectives, discounts such as social tariffs were inconsistent, firms’ progress in improving support to customers in vulnerable circumstances was mixed, and regulatory incentives to promote service quality were limited (National Audit Office 2017, at 8-9). I am going to look at the first three of these issues to see what, if anything, has changed since 2017.

Responsibilities of Government and the Regulators

Since the NAO published its report, two strategic statements have been published for Ofcom and Ofwat. No strategy statement had been published for Ofgem until a draft emerged in May 2023 (Department for Energy Security and Net Zero 2023b). In its report on energy pricing in the wake of numerous supplier failures in energy (BEIS Committee 2022, paras 58-67), the BEIS Select Committee concluded that Ofgem had not properly raised the risks of its deregulatory approach with government and that government had not properly understood the regulatory failings of Ofgem. They wanted BEIS and Ofgem to produce a new Framework Document setting out their relationship and for government to publish the Strategy and Policy Statement in order, among other things, to clarify the division of responsibilities between BEIS and Ofgem.

The draft Strategy and Policy Statement (Department for Energy Security and Net Zero 2023a) focuses on three priorities: enabling clean energy and net zero infrastructure, ensuring energy security and protecting consumers, and an energy system fit for the future. A significant amount of the Statement is devoted to explaining the role of the Future System Operator and its relationship with government and Ofgem. As can be seen from the priorities listed above, the main focus is net zero and the development of the energy system for the future. Consumer protection and enforcement is limited to three paragraphs and Ofgem is urged to understand the experiences of consumers in response to suppliers’ behaviour and to continue to challenge the companies to meet the needs of consumers who are struggling to afford their energy bills.

As regards Ofcom, the strategy and policy statement relates to three areas: telecommunications, management of radio spectrum, and postal services, as specified in section 2A Communications Act 2003. The main emphasis of the statement is on telecommunications infrastructure as it followed the Future Telecoms Infrastructure Review (Department of Culture, Media and Sport (DCMS) 2018) and incorporates the conclusions of that review. As regards consumers, the statement sets out four objectives: preventing harmful business practices, providing consumers with better data, information, and support so that they can become more engaged in the market, remove barriers to switching, and increase overall customer service Department of Culture, Media and Sport (DCMS) 2018, para 46). Ofcom is about to obtain new responsibilities for online safety and the Online Safety Bill provides that the Secretary of State may designate a statement of strategic priorities (Clause 144) which, if done, Ofcom must have regard to when carrying out their online functions (Clause 79). The one area of Ofcom operations which is not covered by a strategy and policy statement is its responsibilities regarding broadcasting regulation which is potentially the most controversial part of Ofcom’s remit.

The strategy statement for water was accompanied by the water industry strategic environmental requirements (WISER) (Department for Environment, Food and Rural Affairs (Defra) 2022b), and the latter sets out the environmental expectations for the 2024 Price Review. The majority of the strategy statement focuses on environmental matters and the resilience of the water industry and much of this involves considering the position of other regulators, such as the Environment Agency. Resilience includes managing water needs and resources, improving resilience in relation to flooding, and looking after the health of water sector assets. In the section on customers, Ofwat is expected to challenge water companies to treat all customers fairly, to strengthen the focus on protecting vulnerable customers, encouraging water companies to implement the recommendations of CC Water’s Affordability Review, challenge water companies to proactively manage customer debt, encourage water companies to engage meaningfully with their customers, and to use markets to deliver for customers. The statement has nothing to say about the government’s role in relation to affordability issues.

There have been a series of letters published by the Treasury to the FCA giving the FCA recommendations (HM Treasury 2017, 2021, 2022a). The letter of 2017 sets out six broad headings where the FCA should consider government economic policy: increasing competition in financial services, encouraging economic growth, ensuring the competitiveness of London as a financial centre, encouraging innovation, encouraging trade and investment, and providing better outcomes for consumers. In 2021, climate change and the commitment to a net zero economy were added, as well as some of the emphasis in the economic policy objectives changing, and in 2022, the issue of energy security was added. The FCA has published a response to the 2021 and 2022 letters which sets out the activities that it has undertaken under each of these heads, as well as some thoughts about future changes (Financial Conduct Authority (FCA) 2022b). This dialogue provides the beginning for an understanding of the relationship between the Treasury’s economic objectives and the work of the FCA.

Looking at the sectors as a whole, the relationship between government policies and regulators seems to have been set out in three out of the four, with energy soon to follow. The position in relation to Ofcom is slightly messy because of changes in Ofcom’s remit but does notably exclude the most politically controversial area, that of broadcasting regulation. The strategy statement for Ofwat is, to some extent, encouraging Ofwat to consider decisions made by other regulators and to encourage companies to act consistently with those decisions. This has always been a feature of the water industry; Ofwat deals with economic regulation and other regulators deal with environmental and quality issues and the approaches need coordination. Arguably, this leads to a more open process, as the different institutions have to explain what they are doing, rather than trade-offs being done internally within one. For the four sectors, there does seem to be a level of clarity. As regards energy, the Statement has little to say about affordability and this is currently a highly controversial subject which has resulted in significant government intervention since 2018. The more general question is how much, if any, of these statements will survive a change in government.

Translating Aims into Objectives

I will begin by looking at whether the regulators have developed detailed objectives and the starting point will be the energy and water industries.

In its 2019 consumer vulnerability strategy, Ofgem sets out five main themes which translate into eighteen objectives all of which are accompanied by means of measuring outcomes. The outcomes are not expressed as targets; they are often expressed as making things better. For example, Outcome 3B: “We want industry have [sic] systems to better target and to tailor their customer service to consumers with specific needs.” This is to be measured in three ways:

• 1. Energy companies have processes in place to get insight into what different consumers expect from their services. This can be through having a consumer panel.

• 2. As part of [Ofgem’s] vulnerability report, collect good practice case studies of tailored support. From this, assess suppliers’ approach to making improvements to their customer service targets.

• 3. Continued publication of best practice guides by charities to support companies.

The third of these measurements relies on charities doing the work, which can be rolled into the second way of measuring what the industry is doing. It is difficult to understand how Ofgem assesses these measurements. The consumer vulnerability report referred to in the strategy was published once in 2019 and now appears to have been transformed into a consumer protection report. There is no discussion in either of these reports about energy company processes although there are examples of high level anonymized good practices.

This is not an argument that Ofgem does no monitoring of its objectives. It is clear that things like the number of customers on the Priority Services Register, services provided under that Register and customers in debt and the level of debt are monitored. It is, however, difficult for an outside observer to follow trends themselves, we are reliant on the Ofgem publications where the focus in the last couple of years has shifted. Companies are required to provide Ofgem with data on certain social obligations and, until 2018, there was an annual report with this data, broken down by provider. This appears to have been discontinued, but the data are still used in Ofgem publications. This approach makes it difficult to follow trends in data.

Ofwat has made the most progress in translating high-level aims into measurable objectives. As a result of PR19, all water companies are subject to a performance commitment to improve the number of customers on their Priority Service Registers (PSR) to 7% of the eligible population. All of the water companies have entered into individualized commitments in relation to vulnerability and affordability (OFWAT 2019b). All but one of the companies undertook to either increase the number of customers who received financial support or to reduce the number of customers in water poverty. Six of the companies promised to meet the BSI standards for inclusive service. The other most common commitment was to survey customers about their satisfaction with the services, specifically for vulnerable customers, that they were receiving. All these commitments have targets and will be reported on by the water companies and any impact is described as reputational.

If a broader approach is taken, this looks less impressive. The focus on increasing the number of customers on the PSR is beside the point, as the PSR offers limited non-financial support and is imperfect as a means of identifying customers in vulnerable circumstances as the criteria for entry are circumscribed. Surveying customers about their satisfaction with services is desirable, but not as important as ensuring that the services are appropriate. On the other hand, commitments to inclusive service and the widespread commitments on affordability and social tariffs are very large steps forward for an industry.

While in both energy and water, there has been an attempt to move from high-level aims to objectives, this has not been the case in communications and financial services. In communications, Ofcom has limited itself to producing guidance (Ofcom 2020) on treating vulnerable customers fairly. The guidance offers a set of practical measures that providers could take in order to ensure that vulnerable customers are treated fairly. It is not prescriptive and sets out these suggestions at a high level of generality although it has been amended to include additional good practice measures that providers should adopt to treat financially vulnerable customers fairly (Ofcom 2022a).

The FCA has taken a similar approach in offering guidance to firms on how to treat customers in vulnerable circumstances (Financial Conduct Authority (FCA) 2021) although the new Consumer Duty will also have an impact. Similar to Ofcom, although more detailed, this guidance is not prescriptive except where specific existing legal obligation, such as in relation to data protection, are in place.

Affordability and Social Tariffs

The relationship between vulnerability and affordability is difficult for the regulators. They often identify low income as being one of the risk factors for vulnerability, but they have no power over the income that consumers receive (Ofwat 2016, at 23; Ofgem 2019, at 62). Ofwat dealt with this problem in PR 19 by splitting the topics. Whatever they are doing, regulators are not in the business of redistributive policies—this is a matter for government.

The main issue for consumers in the near future will be financial vulnerability due to increases in the cost of living. Prices are rising with inflation predicted to top 10% in 2023 while wages have been stagnant. This will increase the poverty premium problem for those in work, let alone those dependent on benefits. Many consumers are going to be under financial stress: Energy bills are rising substantially despite the price cap. Cornwall Insight has predicted that an average energy bill will rise to around £3,500 from October 2022 and then above £4,000 for the first two quarters of 2023 (Cornwall Insight 2022). The Universal Credit uplift has ended, there is increased taxation (NHS and Social Care levy on National Insurance, freezing personal allowance). The government introduced a range of measures to respond to rising energy prices, but this was before the spike in gas prices caused by the war in Ukraine and the high rise in inflation (HM Treasury 2022b).

Vulnerability policy does not address the seriousness of this issue. There are company specific social tariffs in water, but they are limited to what is acceptable to consumers. There has been a wide-ranging review by CC Water which recommended a national social tariff but there has been no government consultation on the issue (CC Water 2021).

In the energy sector, there are no social tariffs, just a patchwork of financial provision with best known being Warm Homes Discount. This was a rebate for £140 up until 2022 and was limited in scope. As part of the package of measures introduced to deal with the rise in energy prices, a new version of the Warm Homes Discount scheme has been introduced which raises the rebate to £150 in England for people in receipt of pension credit and a range of benefits, such as Universal Credit. A separate scheme is being developed for Scotland. Because of the political situation, there is no prospect of movement in Northern Ireland. For all electricity consumers, they will receive a credit of £400 from October 2022 (Gov.uk no date). For households in England, there will be an additional £150 Council Tax rebate for homes in bands A–D. Pensioner households are due to receive an extra £300 to help deal with rising energy costs. A price cap has been introduced on unit costs for electricity and gas in response to the rise in wholesale prices.

In telecommunications, there are a few, not well known, provider schemes which can be described as social tariffs (Ofcom 2022c). Ofcom has no legislative power which would bear on this issue. There is nothing equivalent to a social tariff in financial services, although there are some basic bank accounts.

The position has not changed since 2017. There are some company specific social tariff provisions in the water sector and a few, little used, schemes in telecommunications. In energy, the government has responded to the price crisis by providing some support for consumers, on the order of around £1200 and then freezing the unit price of energy for the next 2 years. This is, justifiably, a temporary response to an extraordinary problem but still leaves open the issue of what happens after this temporary period because living standards will still have been squeezed, especially for the most vulnerable. There have been calls for a social tariff from the charitable sector (Age 2023; Citizens Advice 2022) and indications that the government has considered this option,²⁰ although the most recent publication contains no mention of it (Department for Energy Security and Net Zero 2023a).

Digital Vulnerability

This section considers the position of those who have no or limited access to the internet. Given modern trends in the delivery of essential services, this creates problems for these consumers and may often mean that they do not have access to the best deals.

According to the Office for National Statistics, in 2020, internet penetration was 96% of households in GB, while research (Lloyds Bank 2022) estimated that there was still 2.6 million people offline, even though more people had come online because of COVID. Age is the main driver of this, particularly among single households over sixty-five, although one in 10 of the people offline are under 50, which indicates that other factors may be an issue as well. It also is the case that those with disabilities are less likely to use the internet (Office for National Statistics 2020, Table 4). So those without internet access look more likely to be customers in vulnerable circumstances and, according to Ofcom, the lowest income households and those in receipt of benefits (Ofcom 2022b). The Lloyds research says that those who are offline have raised significant barriers to their digital transition, which suggests that there will be a persistent group who remain offline. This will be a problem, given the transition of essential service providers to online access by default.

Conclusion

Has vulnerability policy been a success? There has certainly been a great deal of policy development and all the regulators now have a framework for vulnerability policy. As regulators have placed more emphasis on vulnerability so has industry begun to give it a higher priority, most notably in the energy and water sectors. There are also beginning to be signs that regulators may enforce this policy as Ofgem has taken action against Utilita for its lack of support for vulnerable customers and Scottish Power for its debt repayment plans (OFGEM 2022). It is, however, evident that a number of the weaknesses identified by the NAO in 2017 still remain. This is exacerbated by the currently uncertain position of the regulators. There has been a great deal of speculation about what might happen to Ofgem because of the energy price crisis and some very public criticisms of its performance. The appointment of the new chair of Ofcom was a protracted exercise, Ofwat has received heavy criticism for its role in relation to sewage overflows going into seawater and changes to the FCA mandate are envisaged under the Financial Services and Markets Bill. Given the febrile state of UK politics, it is difficult to have confidence in a stable regulatory environment.

The real question for the success of vulnerability policy is whether or not it will lead to different behaviour by the firms. However, the issue of vulnerability has been overtaken by problems of affordability created by the rises in energy prices and growing inflation in the UK economy. As seen above, regulators have always tried to isolate vulnerability concerns from affordability ones, even though this is an artificial distinction as thinking about vulnerability without including financial vulnerability ignores an important risk factor. From a regulatory perspective, issues of affordability are matters for government to tackle as they are distributional issues which should be decided by elected politicians. Recent government have been very reluctant to tackle this issue on anything other than an ad hoc basis.