House of Commons - Time to bring on the referee? The Government's proposed Adjudicator for the Groceries Code - Business, Innovation and Skills Committee

Time to bring on the referee? The Government's proposed Adjudicator for the Groceries Code - Business, Innovation and Skills Committee Contents

2 The case for an Adjudicator

What the draft Bill provides for

13. Clause 1 and Schedule 1 of the draft Bill establish the office of the Groceries Code Adjudicator as well as its legal status, terms of office and other related matters.

Views on the need for an Adjudicator

14. This being pre-legislative scrutiny, we believed our inquiry should include a general review of the case for creating an Adjudicator. We also felt that a broad reassessment of the arguments for and against setting up a new statutory body would help us in evaluating whether the draft Bill provided an adequate regulatory framework, or alternatively risked over-regulating. Our first questions to witnesses were therefore about the principle of whether an Adjudicator was needed.

15. Witnesses from trade organisations all believed that there was a need for an Adjudicator. The Food and Drink Federation, neatly summarised its view of the commercial reality:

The problem is we have a highly concentrated grocery market, where retailers have a lot of power, and they can exert that power in a negotiation that is tough every single day of the week. If they can do that and they can get away with it, they will do it and it will get worse. That is why the Competition Commission found hundreds of problems and unfair practices, and why we need the GSCOP. GSCOP is the tool by which we know what the rules now are. We need to make sure they are being complied with.[9]

The Federation concluded that: "GSCOP is the rule book, but we now need the referee."[10]

16. The National Farmers Union argued that an Adjudicator would help underpin the GSCOP:

Currently, in the absence of an Adjudicator, if a supplier has cause to complain about an alleged breach of the GSCOP, there are only two possible courses of action. Firstly, he can use the dispute resolution procedure set out in the Order establishing the GSCOP. This requires him to raise the potential breach with the retailer concerned. This is an unattractive course of action for many suppliers, who are understandably reluctant to complain if their identities are not protected for fear of reprisals, Secondly, a supplier can (on the basis that the GSCOP has been incorporated into any supply agreements as required under the Order) bring a legal action for breach of contract. Litigation is […] also an unattractive option, leading to lengthy, stressful and sometimes costly actions which again do not protect the anonymity of parties.[11]

17. The British Brands Group believed that an Adjudicator was necessary to counter the high degree of reluctance of suppliers to come forward,:

It is [...] well known that suppliers will not speak out. It is commercial suicide to do so, for large and small suppliers alike. An Adjudicator, if implemented as the Competition Commission recommends, has potential to overcome this reticence.[12]

It also pointed out a possible defect in the GSCOP regime compared with its predecessor which would support the need for an Adjudicator:

The current regime (the GSCOP with no independent monitoring and enforcement) is weaker than the regime under the old SCOP, a situation that runs counter to the Competition Commission's intention. Under the SCOP, suppliers and trade organisations could contact the OFT. This is no longer possible, with arbitration under the GSCOP and legal action under contract law being the only available (but wholly unrealistic) options.[13]

18. The evidence on suppliers' reluctance to come forward was important, because during our inquiry we were frustrated by the lack of concrete examples of malpractice and of up-to-date figures (even ballpark figures) on the current numbers of grievances. Given the claimed extent of the problem, we would have expected there to be a great many more examples from supplier representative bodies, albeit anonymised. Only later on in the inquiry were we made aware, on a confidential basis, of data showing strong evidence of a continuing problem. We return to this later in our Report.

19. The large retailers, while accepting that the draft Bill would probably now proceed, were not convinced of the need to add to GSCOP. Sainsbury's challenged the view of supplier organisations asserting that "this so called climate of fear is something that we do not recognise.[14] The Co-op Group supported the establishment of GSCOP but rejected the need for "the creation of a separate body to oversee its functioning.[15]

20. Similarly, the large retailers' most significant representative body, the British Retail Consortium—whose membership covers nine out of ten of the large retailers[16]—indicated that despite scepticism its focus had now moved from the "whether" to the "how":

Retailers supported the launch of GSCOP and its appropriate enforcement. Whilst our preference would not have been for a separate body to oversee GSCOP our evidence concerns itself more with the process and operation of the proposed body.[17]

However, the Consortium acknowledged that Waitrose, one of its members, took a different view.[18]

21. The large retailers' principal argument against an Adjudicator was one of 'not yet'. In its response to the 2010 consultation, the Co-op Group argued:

Since 2006 our assessment had been that a two to three year bedding-in period (without an Enforcement Body in place) of the radically enhanced supplier position under GSCOP […] might have much to commend it. This in the sense that if GSCOP alone were to prove a powerful enough corrective to the shortcomings the Commission had identified in the supply chain (and to us it seemed a perfectly serious proposition that it would be), then the inception of the Enforcement Body would be superfluous, and with that wasteful of time, energy and money (whether public or private).[19]

22. The British Retail Consortium also believed that a two year period of monitoring of GSCOP was "a better course of action" than the early establishment of an Adjudicator.[20]

Compliance efforts to date

23. Sainsbury's believed that GSCOP had already made a positive impact on the industry and cited its compliance record so far as evidence of the Code's success:

Since the new Code came into force on 4 February 2010, we have received fewer than 10 supplier complaints out of over 3,000 suppliers, and all of them have been settled internally to the satisfaction of the suppliers without the need for recourse to the "Dispute" process under the Code. [21]

24. Sainsbury's also wrote to us with details of its costs of compliance under GSCOP, to which we return under the chapter on reporting and supervision. However, it is worth highlighting up front that Sainsbury's set-up costs of complying with GSCOP were of the order of £2m,[22] compared with an estimate of £100,000 in the Impact Assessment.[23] Given that this covered project team costs, training and most significantly external legal advice, it seems credible. The estimated ongoing compliance costs—including monthly employee training, management oversight, an internal lawyer for day-to-day advice and dispute management, external legal advice and annual compliance report preparation—are £0.2m per year compared with £0.17m in the Impact Assessment.[24]

25. The Co-op Group also cited its investment in compliance:

The Co-operative Group has invested significantly in a GSCOP compliance regime diligently monitored by its Internal Audit function. A detailed audit program has been developed which aims to test buyer compliance against the various aspects of the code. For the 12 month period up to the end February 2011 we completed audits with 9 food suppliers and 1 healthcare supplier. The plan for 2011 is for completion of audits across a further 8 Food suppliers and 1 healthcare supplier. At June 2011 we are in line with our plan. All our buyers (and some 400 others) were trained prior to the inception of GSCOP by our Legal team and annual refresher training took place in September 2010. An update is due in September 2011.

26. Tesco believed that suppliers had been willing to come forward:

We have received correspondence from large and small suppliers through a variety of channels without the need for anonymity. Suppliers have been willing to contact their buyer to raise an issue. Others have gone directly to the Code compliance team.[26]

HAS THE GSCOP ITSELF IMPROVED SUPPLIER RELATIONS?

27. The retailers also put the case that the introduction of GSCOP had already improved supplier-retailer relations. Asda said:

[…] a lot of the issues that still hang around this issue date back to 2006 to 2008, and actually they were covered in GSCOP. A lot of the noise that we hear from some of our supplier groups relates to dated issues that have been adequately addressed by GSCOP in our view.[27]

It went on to argue that greater precision of the new Code had improved the ""rather vague principle of reasonableness under the old SCOP to a very detailed set of provisions under the new code.[28] One might, however, also argue that a more precise code would conversely encourage more confidence in bringing complaints.

28. The NFU conceded that the new Code was an improvement on the original Code but the union argued that there still remained "too many examples of bad practices" being reported to them.[29] The Food and Drink Federation took a similar view that GSOP had delivered "small, incremental improvements.[30]

COMPLIANCE DATA FROM THE OFT

29. Through the Department, the OFT provided a summary of compliance issues with GSCOP last year from the period between introduction of the Code, in February 2010 and August 2010. The figures for September 2010 to August 2011 are not available yet but the OFT plans to produce an interim report on compliance in August 2011.

30. It can be seen that at least during the period February 2010 to August 2010 the issues were mainly bunched around complaints under a small number of Code articles, principally aspects of the fair dealing requirement and de-listing.

GSCOP ISSUES RAISED WITH GROCERY RETAILERS 4 FEBRUARY TO 31 AUGUST 2010

Issue GSCOP article No. of complaints/ issues

Recovery of over-payment A2 - Fair dealing 1

Fair dealing A2 - Fair dealing 4

Inaccurate payments A2 - Fair dealing 1

Payment terms A5 - Delay in payment 2

Promotions A13 - Promotions 2

De-listing A16 - De-listing 7

Other Outside GSCOP 4

Totals 21

OFT has categorised GSCOP complaints/ issues into four levels:

Level 1 - written and verbal allegations dealt with anyone except Code Compliance Officer (CCO)

Level 2 - complaint made direct to CCO but Dispute does not arise

Level 3 - complaint made direct to CCO but Dispute arises

Level 4 - Dispute referred to arbitration

31. The OFT explained the outcomes as follows:

20 cases were resolved at Level 1. One case was resolved at Level 3. There were no cases at Levels 2 or 4.

A number of other queries were received by retailers about interpretation of the GSCOP. There may have been some blurring at edges between these and complaints.

32. We note that so far no cases have proceeded to arbitration.

The suppliers' viewpoint

33. Commenting on the low levels of overt complaints, the Food and Drink Federation argued that appearances could be deceptive:

If we go back to something like the Supermarket Code of Practice and the OFT's looking into that in 2005, predating the Competition Commission inquiry, they did a review that was broadly positive about compliance with the Supermarket Code of Practice at that time. The Competition Commission then investigated the market and found hundreds of breaches of what they felt were unfair practices.[31]

34. In oral evidence, the NFU was adamant that the main problem was not with reported complaints but with unreported complaints, and asserted that complainants were still reluctant to come forward under the new Code. However, the union was unable to provide an approximate estimate of possible grievances. It did agree to try to produce further numbers, ultimately submitting a supplementary memorandum which referred to its representative hearing "complaints about retailer behaviour on an almost weekly basis, sometimes more often", and stated that:

over half of all our members in some of the [dairy, livestock and horticulture] sectors have at one time or another been subject to retailer practices, either directly or indirectly, that almost certainly contravene the code.[32]

35. It has to be said that this fell somewhat short of the level of detail that we had expected, even allowing for sensitivity around disclosure. No dates were provided, and given that the reference was only to the complaints heard by one representative, no firm estimate of overall numbers.

36. . By contrast, the Food and Drink Federation told us that an anonymous survey conducted by Food and Drink Europe found that 77% of those surveyed reported non-respect of contractual terms. De-listing threats to obtain unjustified advantage were reported by 75% and unilateral deductions to invoices without sound business reason were reported by 60%.[33] FDF also referred to separate albeit historical survey data indicating that 44% of respondents were afraid of commercial sanctions being imposed on complainants under the old Code.[34]

Confidential evidence received by the Committee

37. As already mentioned, we received a number of elements of evidence on a confidential basis. One of these related to the commercial background to supplier relations and was highly revealing on perceptions of bargaining power and relative negotiating strength. While not evidencing actual Code infringements, it threw considerable light on the context in which the Code operates, and might further explain the reluctance of bodies such as the NFU to be more forthcoming. Another source gave greater detail on persistent high levels of Code infraction, particularly in relation to late payments, threats of de-listing to obtain commercial advantage and unilateral cessation without reason.

38. We naturally viewed this evidence with some caution, but we measured it alongside the accounts we had heard from suppliers and supplier representative bodies in oral evidence and by way of written submission in forming an overall picture of what was going on.

A further review before the Bill comes into force?

39. The Impact Assessment published with the draft Bill anticipated that the Bill would come into force in April 2013. Given that, and bearing in mind the relatively long period elapsed since the Competition Commission's investigations between 2006 and 2008, we explored both the principle and practicality of conducting a further review of compliance before implementation. On the face of it, such a review would not involve any delay to the Bill, since it could be conducted during the period before implementation. The Bill could proceed meantime, albeit possibly with the need for some adjustment to allow the findings of the review to be taken into account.

40. With some caution, the large retailers favoured a review. Sainsbury's said:

Certainly we think the concept of review is worthwhile. [However,] the scope and status of that review is quite important. Certainly we do not believe that should become yet another Competition Commission Inquiry; we have just gone through two of those in the last 10 years. Provided that there are very restricted terms of reference, we think a review would be very sensible.[35]

41. Asda added:

One of our concerns is about the danger of the legislation getting the cart before the horse. Having an adjudicator in some ways seems to presuppose that GSCOP is not working, will not work, or is not fit for purpose. There has been no evaluation of how effective GSCOP has been in addressing some of the concerns the Competition Commission identified and in dealing with, as the Chair said, the 300-odd incidences it identified some five to seven years ago.[36]

42. However, the Association of Convenience Stores believed that a review would be the wrong route. The Association argued that it was for the Adjudicator to obtain such evidence, and then act on it:

I actually think one of the reasons you need the Adjudicator is in order to get the hard evidence.[37]

43. Waitrose agreed, adding that the internal (i.e. OFT) approval process for a review could increase the risk of the review impacting on overall timing. Interestingly, whereas Asda took the view that introducing an Adjudicator before a full review would 'put the cart before the horse', Waitrose believed that the 'cart before horse' would result from instituting a further review before allowing the Adjudicator to start work.[38]

44. The Association of Convenience Stores reminded us why there had been a delay:

[…] there was a two-year period in which the Competition Commission tried to create an ombudsman on a voluntary basis. […] [T]here was no agreement on a voluntary approach. Therefore, we have to follow through now […] because that was ultimately the threat the Competition Commission had.[39]

45. We understand informally that although the Government could in theory commission further independent research on the extent of unreported Code infractions, the subsequent decision on how to proceed would probably require a further consultation period. Insofar as that could further delay the establishment of an Adjudicator in the face, possibly, of strong further supporting evidence that one was needed, we would not wish to see that course being followed. More importantly, despite an apparent improvement in compliance, the balance of the confidential and non-confidential evidence we have seen is sufficient to conclude that a further review would at this point be superfluous.

46. Although it is not ideal to proceed with legislation based on evidence obtained largely in the period 2006-08, there is sufficient additional recent evidence of continuing problems to support the original data. We therefore reject the need for an additional review at this time.

Whether to proceed with the Bill

47. With such clear efforts being made by the large retailers to train buyers in improved compliance with GSCOP, it seems unlikely that there has not been at least some improvement in supplier relations. At the very least, small incremental improvements were recognised by all of our witnesses. However, on balance we believe that there remains at least a sufficient level of concern around compliance with the Code, and about likely reluctance to complain, to justify proceeding with the creation of an Adjudicator.

48. We welcome the substantial investment made by large retailers to improve compliance with the Code. We also recognise that supermarkets in the UK continue to provide a highly competitive offering and hence substantial benefits to consumers. However, many suppliers still believe that only the establishment of an Adjudicator will give them the confidence to air their grievances fully. On the evidence before us, we conclude that there remains a sufficient level of concern with compliance to justify the creation of a statutory Adjudicator. Setting up an Adjudicator might also help address the concerns we heard about the costs of pursuing legal action for Code infringement. For those reasons, we believe there that the Government's proposal to introduce a Bill should be endorsed.

9 Q 234 Back

10 Q 184, Jones; see similarly Q 229, Brennan Back

11 Ev 75 Back

12 Ev w6 Back

13 Ibid. The procedure whereby under SCOP the OFT could intervene in a failed mediation did not, however, provide for a particularly 'hands-on' remedy by the OFT. That, of course, is not an argument for having no analogous remedy-or indeed a better one-under a new regime, so the point remains valid. Back

14 Q 133 Back

15 Ev 70 Back

16 The large retailers designated under GSCOP are: Aldi, Asda, Co-op, Iceland, Lidl, Marks and Spencer, Morrisons, Sainsbury's, Tesco, Waitrose. The only large retailer that is not a BRC member is Lidl. Back

17 Ev 62 Back

18 Ibid. Back

19 Response to 2010 consultation, paragraph 7. It should be noted that the individual responses to consultation were made public in response to a freedom of information request, but with commercially sensitive matters redacted. Back

20 Response to 2010 consultation, answer to question 7 Back