Regulators including Ofgem use codes of practice to curb bad behaviour by businesses –– how to tell if this works

UK energy regulator Ofgem wants to make^[1] its voluntary code of practice on prepayment meters compulsory^[2]. It introduced the code in April 2022 to protect people from being forced onto prepayment meters for gas and electricity.

As the cost-of-living crisis sent energy bills spiralling, UK energy companies were criticised for forcing vulnerable people onto these meters to ensure payment for gas and electricity. In some instances, contractors were reported to have forced their way into homes^[3] to install them.

Predominantly used by low-income consumers, prepayment meters have traditionally been more expensive compared to paying via direct debit. And according to consumer service Citizens Advice^[4], 3 million people ran out of credit on their prepayment meters in 2022. This increases the risk of being without power to cook, keep the lights or heating on.

The UK government has since announced it will bring the two sets of charges in line. But groups including the End Fuel Poverty Coalition^[5] have called for more radical action, such as banning forced installation of prepayment meters altogether. Instead, Ofgem launched a code of practice in April to which UK energy companies voluntarily signed up^[6]. These companies are then required to comply with it to be able to move a customer on to a prepayment meter.

Ofgem’s move to make the code compulsory raises the question of whether – in this situation at least – a code of practice was enough to ensure ethical behaviour.

What is a code of practice?

Regulators or industry bodies use a code of practice that typically cover the behaviour and actions of professions, companies or industries. They are often voluntary, are sometimes referred to as self-regulation and can be developed by political institutions or by companies themselves. Many of these codes cover topics and areas that are not easily controlled by regulation, such as company values or an employee’s ethical behaviour.

Codes of practice widely used in the private and public sector^[7] to eliminate unethical behaviour for many years. In fact, they actually affect almost all aspects of our lives – from our behaviour in the workplace to the supply chains of the clothes and food we buy.

For example, if you work for a major UK employer such as Tesco^[8], AstraZeneca^[9] or Lloyds Banking Group^[10], your conduct at work is governed by a code of practice. When you buy a pair of trainers from a high street store such as JD Sports^[11] or a dress from Next^[12], these are covered by codes concerning the treatment of workers and the environment throughout the supply chain. Even the teachers at your children’s school are covered by a code of conduct^[13].

Critiquing the code

Three main criticisms have been levelled at voluntary codes by academic researchers. Companies and industries have been criticised for using voluntary codes as a public relations tool^[14] to change perceptions rather than rooting out unethical practices. Many codes are also believed to include little in terms of content that would lead to a meaningful change in practice. Instead they often simply list what they are legally obliged to do^[15] or what they’re already doing. Finally, industries and professions have been accused of using codes to protect themselves^[16] from lawsuits, government intervention or competition from new market entrants.

Leaving aside the controversies around codes of practice, what does academic research tell us about their effectiveness? The short answer is that it depends. A recent review^[17] of the existing academic evidence concluded that codes have “somewhat positive” effects in a number of areas. This includes a reduction in (largely self-reported) unethical behaviour by employees and management, as well as positive effects on labour conditions in the supply chain.

However, there are some important caveats to this. To be effective, voluntary codes and standards have to prescribe or root out behaviours and practices that make a material difference to organisational and staff conduct. It’s important that new practices are actually adopted as a result, as is the degree to which the code is embedded in the organisations. The latter can happen when, for example, leadership teams demonstrate good conduct^[18].

A review of voluntary standards^[19] in international microfinance found that most codes and self-regulatory frameworks lacked independent verification, robust monitoring and consequences for noncompliance. Voluntary standards have also been found to lack the clout to overcome competitive pressures to maximise profit and reduce costs^[20], which may drive unethical behaviour.

What should you expect from a code of practice?

Whether you have to adhere to a code of conduct as part of your job, or you are keen to ensure a company you buy from is acting ethically, research shows there three key questions to ask when examining their code of conduct.

First, what does the code says about how behaviour will be monitored and enforced, and what are the consequences of noncompliance? Second, whether the code has been embedded into the organisation. For example is it included in training, or do leaders talk about it or demonstrate its main points in the way they act? Thirdly, what are the underlying drivers of “bad” behaviour (for example, shareholder pressure to boost profitability), and to what degree has the code acknowledged and attempted to address these?

Based on the available academic evidence outlined above, Ofgem’s code could help to reduce unethical behaviour in the energy industry. However, its long-term success will depend how far energy companies go to make it part of their working cultures. Ofgem’s decision to make the code compulsory would be a good way to ensure this happens.

References

1. ^{^} wants to make (www.theguardian.com)
2. ^{^} code of practice on prepayment meters compulsory (www.ofgem.gov.uk)
3. ^{^} forced their way into homes (news.sky.com)
4. ^{^} Citizens Advice (www.citizensadvice.org.uk)
5. ^{^} the End Fuel Poverty Coalition (twitter.com)
6. ^{^} voluntarily signed up (www.ofgem.gov.uk)
7. ^{^} widely used in the private and public sector (www.researchgate.net)
8. ^{^} Tesco (www.tescoplc.com)
9. ^{^} AstraZeneca (www.astrazeneca.com)
10. ^{^} Lloyds Banking Group (www.lloydsbankinggroup.com)
11. ^{^} JD Sports (www.jdplc.com)
12. ^{^} a dress from Next (www.nextplc.co.uk)
13. ^{^} code of conduct (www.gtce.org.uk)
14. ^{^} using voluntary codes as a public relations tool (onlinelibrary.wiley.com)
15. ^{^} list what they are legally obliged to do (hub.salford.ac.uk)
16. ^{^} protect themselves (link.springer.com)
17. ^{^} recent review (link.springer.com)
18. ^{^} leadership teams demonstrate good conduct (onlinelibrary.wiley.com)
19. ^{^} review of voluntary standards (hub.salford.ac.uk)
20. ^{^} competitive pressures to maximise profit and reduce costs (pure.port.ac.uk)
21. ^{^} PX Media/Shutterstock (www.shutterstock.com)