Why Compliance Matters

Why Compliance Matters

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Connor James

Connor James

Connor James is the Principal of Compliance Quarter.

Why Compliance Matters

Unsurprisingly, it is our view that compliance matters. We say this in the context of a business environment characterised by increasing and increasingly complex regulation.

More Regulation and More Complexity

Despite various governments now having ‘deregulation’ Ministers or Departments, the truth is that regulation is increasing. Whether it’s driving home from work in complying with the Road Rules or speaking to a customer at work in complying with the National Energy Retail Rules, much of what we do on a day-to-day basis is regulated.

The purpose of regulation is to codify society’s expectations. Society’s expectations are constantly changing, and so, regulation is constantly trying to catch up. This is evident in industries that are marked by technological advance with regulation constantly lagging technological advances. Despite various shortcomings, regulation -by and large – does its job and does it well. 

Regulatory Burden

The consequence of additional regulation and additional complexity in regulation is regulatory burden. Regulatory burden is felt both at an organisational level and at an individual (senior executive and director) level.  Personal liability on directors continues to expand, including recently personal liability with unpaid PAYG, meaning that directors can no longer rely on the protection afforded to them by the corporate veil.

A lot of regulatory burden can be lifted with simple rules based automation, but not all. Ask any lawyer who has argued about the meaning of a specific sub-section of an act in the Supreme Court whether all legislation can be codified and be prepared to be laughed at. 

Why Comply

Businesses should understand and operate to the expectations of the society in which they operate.  A business that is not operating in a compliant manner is typically operating outside of society’s expectations and often with negative consequences for its customers, employees, and wider society.

Compliance is closely linked to ethics. Ethical conduct is typically compliant conduct and unethical conduct is often non-compliant. When making a business decision, rather than starting with your lawyer on a technical question of interpretation, first ask yourself if the outcome would be ethical. 

How to Comply

The first step every business should take in seeking to comply is identifying the various applicable obligations and standards. Many businesses have not taken this first step and operate without knowing what they should or indeed must be doing. All businesses should have a regulatory obligation register that sets out all of the key applicable obligations and standards. All businesses should have a process in place to ensure that their regulatory obligation register is up-to-date at all times.

Once your business has an obligation register it needs to consider what steps it will take to ensure compliance. The steps that a business takes to ensure compliance are the controls that it has in place. Controls can take the form of training, regular meetings, updates, systems, and policies and procedures.

Once controls have been mapped to obligations, on an ongoing basis, your business should consider whether those controls are adequate and fit for purpose. This means monitoring non-compliance as you would monitor any other risk. The consequence of non-compliance is obvious and may include fines, negative PR, loss of revenue, and termination of licence.

Of all the businesses that we are involved with, we can predict future non-compliance with close to absolute certainty based on the attitude demonstrated by its directors and senior executives. When we come across a senior executive in a business that has no interest in compliance we can tell that that business is significantly more likely to be found to be non-compliant, to be fined, to lose revenue, or to lose a licence. 

In order to ensure compliance, senior executives and directors must have a good understanding of their businesses’ regulatory obligation registers and the function of each control. If, for example, you are a senior executive in an energy retail business you must read the National Energy Retail Rules and the various other regulatory guidelines. Once you have done so, you should then ask your business whether it has adequate controls in place, whether it is monitoring the effectiveness of those controls, and whether your business is operating in the way that society would expect it to. 

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How to obtain an energy retail authorisation

How to obtain an energy retail authorisation

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If you’re planning to become an energy retailer in those states that have adopted the National Energy Customer Framework, you will require a retail authorisation issued by the Australian Energy Regulator. Broadly, you will need to demonstrate that you:

  • Have the necessary organisational and technical capability;
  • Have financial resources, or access to resources, to operate as a retailer; and
  • Are a suitable person to hold a retail authorisation.

In this post we look at some of the key components of an energy retail authorisation application. 

Organisational and technical capability

When examining your organisational and technical capacity to hold a retail authorisation, the AER will look at your industry experience, operational systems and staff expertise. In practice this means reviewing the resumes of your key staff, the various policies and procedures that you have to ensure compliance with all applicable law, and the systems that you will rely upon to ensure that you operate compliantly.

Experience in the industry

The AER will expect you to have key staff and executives with the necessary level of experience in the energy market. Typically, this means that you will need to have individuals with responsibility for operations, compliance, finance, and risk management who each have experience in the energy market. If you do not have individuals with such experience, you will need to explain how you will bring such capability into the business for example by working with an experienced consultant.

Business plan

your business plan will form the foundation of the AER’s assessment of your retail authorisation application. It provides the context of your proposed operations and scope of operations. In broad terms, your business plan should describe your business, its objectives, its unique selling position, financial and operating forecast for the first 3 to 5 years including anticipated customer growth, revenue and expenses, and a cash flow analysis.

Compliance and risk management

Energy retail is a highly regulated industry, more so than any other industry in Australia. In your energy retail authorisation application, you will need to clearly demonstrate how you are able to comply with all applicable laws. This means that you will need to show that you have a compliance program that is consistent with the relevant Australian standard and that you have various documents in place that set out how you will comply. Alongside compliance is risk management. You will need to provide details of your risk management strategy covering both financial and operational risks.

Financial capability

The AER carries out a point in time assessment of an applicant’s financial capacity. They are looking to ensure that an applicant has (or has access to) adequate financial capacity to support the planned retail operations. Consequently, such an assessment relies heavily on an applicant’s business plan and approach to managing financial risk. In practice, the AER looks to ensure that you will have access to capital equal to at least one years’ worth of operating expenses assuming that you have no revenue. In examining operating expenses, the AER would expect you to include staffing, insurance, accommodation, wholesale acquisitions, network service costs, customer support and billing system cost, and ombudsman fees.

In terms of satisfying this criterion, the AER will examine your financial reports, if you are an existing business, and details of your current financial position such as interim financial statements and bank statements. The AER will also examine your ownership structure, contractual arrangements, and require declarations from your chief financial officer or chief executive officer. Finally, the AER requires a written declaration from an independent auditor or from your principal financial institution stating that an insolvency event has not occurred, that an insolvency official has not been appointed, and that they are unaware of any other factor that would impede your ability to finance your energy retail activities under the authorisation.

The AER’s assessment of financial capacity is a point in time assessment. On an ongoing basis AEMO is responsible for oversight of a retailer’s financial capacity with respect to wholesale acquisitions.

Suitable Person

The question of whether a person is suitable to retail energy goes beyond an assessment of financial and organisational capacity and extends to a person’s character and reputation. The test here is similar to that applied when a regulator is considering whether a person is ‘fit and proper.’ In examining suitability, the AER looks to previous commercial dealings, as well as that of your offices, associates and any other entity that exerts control over your business activities. Such assessment looks at the degree of honesty and integrity shown in those commercial dealings and whether you are likely to contribute to the national energy retail objective. In satisfying this criterion, you will be required to include a number of declarations including as to any previous criminal convictions and regulatory actions.

Webinar on obtaining a retail authorisation

In the following webinar we provide an overview of the application process for a retail authorisation along with detail on some of the common traps. 

Frequently Asked Questions

No, Victoria has a separate guideline and there are a range of significant differences in the process and expectations of the Victorian Essential Services Commission when compared to those of the Australian Energy Regulator. Typically, you will require new documents i.e. a financial hardship policy, specifically for Victoria. You should also note that the Essential Services Commission also takes significantly longer to assess an application than the Australian Energy Regulator.

As noted above, you will need to satisfy the AER that you have access to the resources you require elsewhere for example from a consultant. 

If your entity is the one selling energy, it will have the need for a retail authorisation. There is no option to rent a retail authorisation. From the perspective of the AER, the applicant is the entity who was assessed and so needs to satisfy the eligibility criteria. 

If your main business activity is selling energy then it is likely that you will need a retail authorisation. There are various exemptions available if you are selling energy incidentally, for example if you are an owners corporation, however a number of these will be phased out over time.

There is no application fee payable to the AER. There is a fee to apply to become a market participate with AEMO, which is needed if you are going to trade on the energy market and supply on market customers. There are also fees for joining the ombudsman schemes in each state and, finally, SA charge a fee for retailers operating in their state.