Customer-focused licence condition: key questions

 

Ofwat wants to see water companies transform their ability to serve customers and respond to the full diversity of customer needs.

In 2022 we launched our work with the sector to develop a customer-focused licence condition.

Below you can find out some answers to some key questions about our work.

We welcome views on our work. More details of how to get involved are on the customer-focused licence condition homepage.

Why is Ofwat doing this work?

All water customers expect their needs to be met and things to be put right quickly when they go wrong

The water sector faces big challenges to deliver services, such as climate change, delivering greater environmental and social value, and reflecting a clearer understanding of customers and communities. That includes:

  • making sure customers’ diverse needs are properly met, including customers in vulnerable circumstances;
  • with increasing issues over cost of living, affordability and debt, supporting customers who are struggling to pay;
  • where a service is disrupted, ensuring effective communication and support for all affected customers, and that the problem is addressed;
  • meaningfully involving, engaging with and taking account of the views of customers and communities; and
  • improving complaints handling.

There are also huge opportunities for water companies to improve their relationship with customers. That includes:

  • being more representative of the people they serve
  • playing a bigger role in their communities
  • delivering positive benefits to local people; and
  • involving customers in the design and delivery of services.

We want to see water companies transform their ability to serve customers and respond to the full diversity of customer needs.

One of the areas we’re taking action is working to strengthen the rules on how water companies should treat their customers. We are working with customer representatives and the sector to develop a new tool to get water companies to focus more on their customers.

We think adding a customer-focused licence condition to our toolkit will help encourage companies to deliver better experiences for all customers now, and keep on improving over the longer term.

Who do Ofwat mean by ‘customers’?

At the moment we are mainly considering the licence condition for the services companies deliver to household customers.

Most business customers are able to choose their retailer for things like customer service, billing and water efficiency. And there are already other tools we use in this market to protect these customers.

But we’re keen to explore whether the licence condition should cover more than households, recognising that 90% of the non-household bill relates to wholesale services.

Why are we looking at a new licence condition?

We want to see companies transform their behaviour towards customers, including those in vulnerable circumstances, through their day to day services, but also when things go wrong.

Licence conditions can help increase companies’ customer focus while ensuring that we have the right mix of tools to effect change when service falls short. To support the sector’s transformation, licences need to provide a clear regulatory basis in relation to how companies treat their customers.

As part of this work, we will consider how the licence condition will complement our wider regulatory tools to improve the customer experience.

What could the licence condition cover?

We are considering some broad principles:

  • Communications with customers;
  • Support when things go wrong, and help to put things right;
  • Support for customers in vulnerable circumstances;
  • Support for customers who are struggling to pay;
  • Identifying and addressing shortcomings and continuous improvement

But we’re open to other areas it could cover.

How might the new licence condition work?

We want the new condition to be clear to companies, customers and their representatives on what it covers and what we expect companies to do. We need to balance:

  • making the condition detailed enough that companies know what they need to do to comply and what we might do to if they don’t; and
  • not making it too detailed that companies are not able to adapt the services the provide or innovate. We also want the condition to encourage water companies to focus on their customers, rather than constantly proving to us how they comply.

One approach would be for the licence condition to set out a set of principles, rather than a set of detailed rules. It might guide water companies activities generally – or only for some services and certain situations.

In our sector, companies’ licence conditions can be detailed and prescriptive. But there are examples of principles-based conditions, such as the requirement in Condition P to comply with Board Leadership Transparency and Governance (BLTG) principles, introduced in 2019.

In 2018 we worked with the sector to modify elements of the licence, recognising the need for simplicity and clarity about the standards and requirements for which the regulated companies are held to account.

What do regulators in other sectors do?

We are keen to build on the work we have already done on companies’ licences (see above). We also want to learn from the principles-based approaches taken by other economic regulators. For example:

  • Ofgem, the energy regulator, has Standards of Conduct for energy suppliers that focus on treating customers fairly, including requiring energy suppliers to identify and respond to the needs of vulnerable customers. Most recently, ability to pay principles have been added into energy suppliers’ licences, encouraging firms to focus on helping customers struggling to pay their bills. Ofgem’s principles-based approach seeks to make energy firms accountable for consistent application of the principles through suppliers’ licences;
  • The Financial Conduct Authority, the financial service regulator, is developing an overarching Consumer Duty to deliver a significant shift in the approaches and culture of financial services companies. Its recent consultation on the Consumer Duty builds on the FCA’s analysis of the potential gaps left by its existing duty to treat customers fairly. It aims to set a higher level of customer protection in retail financial markets – setting expectations for firms’ standards of care towards customers beyond existing FCA Principles and Rules.

It is important that any principles-based approach is supported by clear guidance on key outcome areas, which could contain further rules and minimum standards as necessary.

We plan to work closely with stakeholders across and beyond the sector in the coming months to develop this, as well as learning from lessons both within this sector and other industries.

How will we create the new condition?

We plan to co-create the new condition with water companies, customer representatives and other interested parties. Our proposed plan:

Once we have a draft condition, we will consult publicly on it so everyone can have their say.

Once we have made our final decisions we will formally consult on implementing the condition into companies licences.

Why are we co-creating the licence condition?

It’s important we can use the new licence condition. But we also think it could be a valuable tool for companies to focus on their customers.

We also think it will be useful to customers and customer representatives in helping hold companies accountable for the services they deliver.

Will the new condition add to regulatory burdens on companies?

Our aim is that it won’t.

We want to balance giving companies the freedom to innovate for their customers – and customers being protected where things go wrong.

The new condition may allow us (in time) to simplify or improve other parts of how we regulate companies – once we’re sure customers are protected.

What happens if water companies disagree with the new licence condition?

We hope by co-creating the condition with companies they won’t disagree.

But if they do:

  • In England, Ofwat can impose the conditions on companies. Each company can choose to appeal our decisions to the Competition and Markets Authority (CMA).
  • In Wales, Ofwat will need to appeal to the CMA if companies do not agree with our decisions.