Market Operator Compliance

David Garner
David Garner

Internal Assurance Manager

David Garner
David Garner

Internal Assurance Manager

As the market operator for the non-household water market, MOSL is obligated to follow the rules set out in the Wholesale Retail Code (WRC) and the Market Arrangements Code (MAC). MOSL conducts an internal self-certification process each quarter to assess compliance with the 1,150 separate obligations with which it must comply. Obligation owners report any non-compliances along with a rectification plan. These are then reported quarterly to the Market Performance Committee (MPC).

There were five instances of MOSL non-compliance, a reduction of two from the previous year. Of these five, only one relates to the Market Performance Framework, specifically, the publication of the Market Performance Operating Plan (MPOP). The remaining non-compliance matters do not relate to market performance. Full details of these matters will be provided in the Market Audit annual report which will be published in May 2021.

Code Subsidiary Document (CSD) 0002 requires that the MPOP be published ahead of the year in which it applies (i.e. the MPOP for 2021/22 should be published before 31 March 2021). Since the market opened in April 2017, the MPOP has always been published in the first quarter of the year to which it applies, rather than in the preceding year. To properly consult on and develop an MPOP which takes account of findings from the previous year in a timely way, indicates a need to review the current relevant code provisions. We will consider these provisions with the Market Performance Committee and the Panel in 2021.

MOSL is reviewing its internal controls and assurance processes as part of the development of an internal Compliance Framework. This involves mapping out core processes relating to our obligations and identifying any material risks of those processes not operating as required. Mitigating controls are then identified and reviewed to ensure these controls are designed appropriately to mitigate the risk and that they are operating effectively through the year. An effective Compliance Framework provides an improved level of assurance that MOSL is meeting its obligations alongside the external assurance work carried out each year by the market auditor.

During 2020/21, MOSL started to develop this framework for a number of higher risk processes. This will continue into 2021/22 with more processes covered by the framework and monitoring of key controls starting to take place. See further information in the Market Audit section below.

Market Audit

The purpose of the market audit is to provide confidence to stakeholders that market participants and MOSL are operating both in compliance and the spirit of the market codes and to provide insight over how market processes could be changed to increase market efficiency and ultimately improve customers' experience.

Over the past year, MOSL has refined its governance of the market audit through increasing the prominence of the Audit Panel Sub-group setting the overall direction and focus of the market audit and discussing the output from reviews and the actions to address findings. This has allowed MOSL and the market auditor to be agile in its response to COVID-19 by designing and delivering reviews quickly, focused on new and emerging risks to the market created by the pandemic, such as application of temporary vacancies and reviewing the payment deferral scheme.

A summary of the work performed across 2020/21 is covered in the table below.

Market Audit work delivered during 2020/21

Trading party compliance

We conducted focused reviews to assess the design and operation of market processes, data and supporting information over a range of defined processes. These reviews provide practical recommendations on how any identified gaps can be closed as well as assessing the compliance of individual retailers and/or wholesalers with particular aspects of the market codes. An overview of the work performed and associated benefits is provided below. Further details on the work carried out will be included in the Market Audit report to be published in May 2021.

Work performed during the year Benefits

A review to assess retailers' responses to apply temporary vacancy statuses as a result of changes and supplementary guidance implemented into the market in response to COVID-19 (change CPW091). A sample of five retailers was selected by MOSL as representative of the variety of approaches and volume of premises impacted.

The market auditor reviewed the processes and mechanisms that each retailer implemented to identify premises that should be marked as temporarily closed to form an assessment of whether they were sufficient and in line with the guidance and revised codes. This was also supplemented by sample testing of premises that had been flagged as vacant due to COVID-19, understanding the reason for flagging and assessing whether this treatment was appropriate.

  • Provided confidence to all stakeholders that retailers implemented sound processes to accurately apply the “temporary vacant” in CMOS and that the differing rates of application were not as a result of a more serious non-compliance.
  • MOSL issued guidance documents to facilitate consistent and accurate interpretation and application of the requirements across the market.
  • A market audit programme with the agility to respond quickly to new and emerging market risks.

Work performed during the year Benefits

A review to consider the accuracy of a sample of retailers' submissions under the Payment Deferral Scheme to ensure payments made between retailers and wholesalers were in accordance with the revised market codes, in line with Change CPW096: ‘Urgent: Payment Deferral Medium Term’

MOSL selected three retailers across three months (May, June and October 2020; nine individual submissions tested in total) for the market auditor to review their monthly submission. The market auditor checked key inputs into the payment calculations against supporting documentation to ensure they were valid. It also re-performed elements of the deferred pay calculation to ensure they were accurate.

  • Provided confidence to trading parties and MOSL that payments made were accurately calculated in accordance with the market codes.
  • Met the obligations of CPW096 that required the market auditor to perform a review over the Payment Deferral Scheme.

Work performed during the year Benefits

A review was planned of the application of evidenced flags against temporary vacancies in the market, with the market auditor developing a number of potential different approaches to how this could be performed. As the market responded to this process, it became clear that the volume of cases was not as high as expected and therefore risk of inaccurate vacant flags being applied was reassessed and considered to be low. As a result, MOSL in conjunction with the Audit Panel Sub-group and the market auditor, decided to not pursue this review further.

  • A market audit programme that could react to changing market conditions to refocus attention and resources to the greatest need and not stick rigidly to a plan where it is not in the market's best interests.

Work performed during the year

MOSL issued a Request for Information (RfI) to all trading parties in February 2021 to understand how trading parties are meeting their data compliance obligations.

Subsequently, MOSL has selected a sample of trading parties for the market auditor to focus on their RfI responses and perform a deep dive over the processes these trading parties have in place to meet their obligations. This is currently ongoing and the output will be a thematic report, containing the findings from the review along with proposed recommendations.

Market operator compliance

A detailed review in March and April 2021 focusing on five key process areas, assessing MOSL's compliance with the MAC and WRC.

Work performed during the year Benefits

The scope of the Market Operator Review for 2020/21 was focused on priority risk areas, as identified by MOSL and the Audit Panel Sub-group. The market auditor also provided review over the preparation, design and implementation of a risk and controls framework (a Compliance Framework) that will improve the maturity of the organisation in response to compliance, financial and operational risks. This framework will also seek to evolve the assurance efforts, and transition the market audit activities over time to a more efficient and effective controls-based audit.

In 2020/21 the five areas selected for review were:

  • Settlement
  • Unplanned Settlement
  • MPS Reporting
  • MO Charging
  • MO Invoicing

In addition the market auditor has included change management into scope, as they consider this to be a key process underpinning the management of market codes and core market systems.

The market auditor reviewed each of these processes, focusing on the design and operating effectiveness of the key controls within each process, through walkthroughs and sample testing. In addition, the market auditor reconciled the obligations from the MAC and WRC to assess the design of the processes against the requirements in the code.

  • The aim of the review is to provide confidence amongst the trading parties and MOSL that the market operator key processes are operating in line with the codes.
  • A more focused review and refined scope than in previous years to ensure targeting of key risk areas and an overall lower fee.

    This review is in progress at the time of this report. The findings will be published separately in May 2021, as part of a separate market audit update.

  • The findings will include any recommendations that MOSL can make to ensure that key controls are designed and operating effectively.

Settlement assurance

Provision of assurance work over the calculation of settlement (for a specified period) by CMOS in accordance with CSD0207 ‘Charge Calculation, Allocation and Aggregation’.

Work performed during the year Benefits

The audit addressed the material risk of misstatement in the calculation of settlement by CMOS, to a level required such that the Market Auditor can issue an ISAE 3000 (Revised) Reasonable Assurance opinion. This included, but was not limited to:

  • Review of the operation of CMOS, and its interaction with the settlements calculation
  • Review of controls in place in relation to the collation, calculation and reporting of the settlement information
  • Review of key data items used in the settlement calculation (for the specified period) to assess the consistency with expected values and use of default values affecting the calculations
  • Development of an independent set of logic to recalculate (for the specified period) the settlement volumes and values.

The ISAE 3000 (Revised) Reasonable Assurance opinion explicitly excludes:

  • Testing or assessing any forward-looking statements and/or data
  • Testing over the completeness and accuracy of the source data held within CMOS, e.g. meter reads and YVE values
  • Recalculating the settlement amounts to/from any market participants on a continuous basis.
  • The aim of this work is to provide assurance that CMOS is accurately calculating settlement in accordance with the relevant aspects of the market codes
  • This testing is in progress at the time of this report. The findings will be published separately in May 2021, as part of a separate market audit update.

Future development of the market audit

The market auditor's role and the overall strategy for assuring market activity is continually evolving and during the year the Market Auditor and MOSL undertook a detailed ‘lessons learnt’ exercise with the Panel's Audit Sub-group. Recommendations included:

  • redefining the purpose of the market audit
  • reviewing the governance framework for the audit and the associated terms of reference; and
  • developing a revised approach to market audit activity to encompass a blend of internal and external resources.

These recommendations are currently being implemented.

The decisions on the scope and approach for future audits will be linked to key and/or emerging risks identified. MOSL, in conjunction with the market auditor and the Audit Panel Sub-group, will assess market risks and determine the most appropriate topics for review, with the objective of maximising benefits from audit activity. This will also complement performance monitoring and rectification activity as MOSL develops its integrated approach to assuring compliance and performance.

MOSL's audit and assurance capability will be complemented by use of the market auditor for specialist work in areas such as the GDPR review, or where further resource for larger scale testing and trading party engagement is required.

With regards to market operator compliance, the market auditor will continue to assess the design and operating effectiveness of MOSL's response to comply with its obligations. As MOSL continues to develop its Compliance Framework, the market auditor will seek to evolve the Market Audit towards a controls-based audit and develop a cyclical testing strategy across the priority risk areas for the market.