Ofwat gives wholesalers go ahead for bespoke, alternative credit arrangements with retailers

Ofwat has told wholesalers they are able to negotiate bespoke alternative credit agreements with retailers without contravening competition law.

The regulator has published guidance which confirmed bespoke arrangements are fine if they “reflect objectively justifiable differences between retailers”. Factors to consider included the retailer’s financial resilience, capital/ownership structure, payment record, and available security.

Any negotiated alternative arrangement does not need to be offered unconditionally to all retailers, Ofwat said, though should be offered to those who exhibit similar characteristics unless a difference in treatment can be justified. “Similarly, if a wholesaler chooses to offer a menu of alternative credit arrangements, it would need to ensure that where retailers were offered terms within the menu, that this approach can be objectively justified.”

The guidance was published following Ofwat’s RISE report last year calling on wholesalers to more actively support the retail market. While the Codes allow wholesalers and retailers to agree alternative credit arrangements instead of using the suite of regulated credit terms, “the evidence suggests that these arrangements have tended to be blanket, one-size-fits-all arrangements, which may not reflect the differences in risk posed by different types of retailers, with wholesalers using competition law as reason not to collaborate or as reason not to be more responsive to the needs and specific circumstances of individual market participants”.

Ofwat said this interpretation of competition law is not correct nor in line with the spirit of the Wholesale Retail Code and could stifle innovation. It explained: “If credit arrangements were more closely linked to individual retailer performance and security, then the necessary requirements to access credit could be reduced and become more proportionate to the risk posed by that retailer. The sector as a whole could then utilise the capital released to support business development and innovation, rather than this capital being tied-up unnecessarily as security for trading obligations.”

Elsewhere the guidance told wholesalers to comply with three principles: supporting market development, collaboration and transparency. It added that wholesalers should not refuse “to negotiate or agree alternative credit agreements because they deem their cumulative risk exposure, across the retailers operating in its area, to be too high. Such an approach is not consistent with the principles included within this guidance and is in contrast to assessing each retailer’s individual credit risk objectively”.