Ofgem has dismissed an appeal from the affiliate sector regarding its ban of cash-back models in the energy sector, instead tightening its policies outlined in its Retail Market Review.
The report, which was published this June, aimed to tackle widespread confusion over the various energy tariffs on offer in the market, making it easier for consumers to switch between providers.
However, it also stipulated that energy providers could no longer use cash-back rewards for consumers who switch, which frustrated many in the cash-back affiliate sector.
The move triggered an appeal, led by the Internet Advertising Bureau (IAB) and its affiliate members including Quidco, Affiliate Window, Top Cashback, Afilinet, and Online Media Group (OMG) in August.
Representatives from a mix of the companies, together with the IAB, met with Ofgem to try and clarify the importance of cash-back rewards and how cash incentives help encourage, rather than deter, consumers from switching energy providers.
However The Drum has learned that Ofgem has rejected the appeal, instead tightening its policies on the ban of using cash rewards in the utility sector, with all to comply by March next year.
Currently the rules only apply to energy providers, but they are expected to extend to comparison sites in the near future, meaning the likes of uSwitch and Moneysupermarket will also have to cease all cash-back rewards for energy providers.
The Drum understands companies such as Co-op Energy have already pulled their cash-back offers in anticipation of the ruling, while others that are still running cash-back offers including npower, M&S Energy, and First Utility will have to pull their cash incentives by March next year.
Nathan Salter, chief operating officer at OMG, which led the appeal, and chair of the legislations and standards committee on the IAB affiliate marketing council, said Ofgem’s drive to make the market more clear and transparent for consumers is welcomed but all, but that cash-back has been unfairly wrapped up in the decisions.
“Our understanding was that they [Ofgem] were looking specifically at how energy providers were rewarding with cash-back, but our argument was that it is the cash-back site that passes on the revenue – not the energy provider itself.
“We believe consumers are clear on that distinction, that they like it and that it goes in the spirit of switching and providing a hook for consumers looking for a good deal. That was what we lobbied.
“Unfortunately they didn’t buy it and the result is that cash-back will now be prohibited. Energy providers are already pulling out of cash-back space – that’s not good for consumers or affiliate businesses,” he said.
Top Cashback’s commercial director James Little said the ruling has “frustrated” the cash-back affiliate market where cash incentives are widely regarded as being the best motivator for switching energy providers.
“The whole point of Ofgem’s report is to encourage switching, which we support, but what it doesn’t get is that cash-back sites do encourage switching. There are approximately six million people who are signed up to cash-back sites, and it will mean they now have less choice,” he said.
Little said it will consider “pushing against” the decision in future, perhaps with the help of its customers. In the meantime it will look to offset the potential revenue loss by incorporating its vouchers incentives in place of cash, a mechanism which it has already developed in anticipation of the changes, according to Little.
Affiliate Window’s strategy director Kevin Edwards said the utility sector relies more on sales driven by cash-back than other types of affiliates, than other sectors like retail or telecoms.
“The tricky thing for utility companies is that cash-back makes up a disproportionate amount of their sales in comparison to other affiliate types – a clear majority of the sales come from cash-back, meaning those that haven’t been looking at alternatives will be hit by it.
“If you compare it to retail or telecoms the implications for those sectors would be less pronounced as a percentage of their sales.”
The UK affiliate sector, which has its own strict self-regulatory processes, is used to operating on a highly transparent basis, but the backfired appeal, and the subsequent tightening of the cash-back ban, has left some feeling penalised.
“It’s frustrating because in trying to do the right thing and be transparent it seems that has ended up being counterproductive and we have been penalised for it.
"I can appreciate that typically people say they find the utility market confusing and don’t understand what the different tariffs and cost implications are – so Ofgem’s wider goal in reducing that complexity is right, but we have been unfairly bundled up in that scenario and have been penalised for offering something that is quite useful for the consumer.
"Essentially it’s a marketing cost that a utility company could be spending with any other channel to generate sales, and if they do then the money will go to Google, or ad agency or whoever has facilitate that sale, but the cash-back model fed the money straight back to the consumer – it empowers the consumer – but instead they now suffer as a result of this need for greater transparency,” said Edwards.
Affilinet UK managing director Helen Southgate agreed Ofgem's decision is "significant" because cash-back is such a large part of the affiliate channel. "Many, but not all, energy providers use cash-back as a tactical and strategic channel to drive sales and they could now find themselves in the position of needing to rebalance their affiliate programme in order to ensure that they can mitigate the potential risk to their business and look at other ways of acquiring new customers," she said.
"I think the frustration with the ruling from an industry perspective is that consumers who use cash-back sites are customers of that site and use cash back rewards across multiple sectors, not just energy. Customers don’t see it as a saving off their energy bills, they see it as a reward for their custom and a way to save money by shopping online, much like a voucher or gift. Ofgem wants to make it easier to switch, but it will be interesting to see if removing cash-back from the equation has the desired effect," she added.
Tom Lyon, energy expert at uSwitch.com, said: "While simplifying the market is a good thing, there was always a danger that consumers could end up losing discounts or other benefits that are of value to them simply because they don’t fit in with Ofgem’s blueprint.
"Consumer engagement needs to be nourished and encouraged to grow - the danger is that removing incentives like cashback could put this at risk. Also, with energy bills at an all-time-high, this extra cash in consumer's pockets could be extremely welcome this winter."
Comparison sites have been given a bit longer to pull all cash-back offers for energy providers. It is understood that the new measures are irreversible.
Ofgem was unavailable for comment at the time of this article's publication.
OMG's chief operating officer and chair of the legislations and standards committee on the IAB affiliate marketing council, Nathan Salter, will write more on this in The Drum's forthcoming performance issue.