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

8  Funding

What the draft Bill provides for

155. Clause 20 sets out powers for the Adjudicator to require large retailers to pay a levy to meet the Adjudicator's expenses, subject to the consent of the Secretary of State. Any surplus remaining at the end of the relevant financial year must be refunded to the retailers. As currently drafted, the levy will be payable by the large retailers in equal shares, but there is power for the Secretary of State to make an Order requiring them to pay "different amounts based on criteria broadly intended to reflect the time and expense that the Adjudicator expects (in the light of previous experience) to incur in dealing with matters relating to different retailers."[126] In other words, the shares can be adjusted to take account of behaviour.

The impact assessment's estimates of costs

156. A breakdown of anticipated costs was given by the Department in response to a request from the Committee.[127] Essentially, the estimated costs break down to £220,000 set-up costs, followed by annual costs of £800,000 in administrative costs and £1,200,000 in costs related to individual investigations (i.e. an estimated £2m estimated annual costs depending on the actual costs of investigations).

157. The Impact Assessment estimated that the Adjudicator was likely to be engaged in something like two arbitrations per year (one complex and one more simple) and between two and four investigations per year.[128] However, the OFT's own response to the 2010 consultation emphasised the difficulty of making reliable estimates of caseload.[129] In dissenting from other Competition Commission panel members on whether the Adjudicator should be established, Professor Lyons cited concerns about the costs of setting up an independent body as one of his reasons for opposing the establishment of an Adjudicator.[130]

158. Sainsbury's and the British Retail Consortium were among those who were concerned about investigation costs spiralling out of control. Sainsbury's said:

    Without guidance on how the Adjudicator will operate we have no way of knowing how accurate the figures are in the Regulatory Impact Assessment (RIA) prepared by Government for the Adjudicator set up and running costs. In any case Government should seek to set a limit on the budget for the Adjudicator and retailers should (a) receive an annual report about how their funds have been used, and (b) be consulted each year about the size of the retailer levy for the coming year.

    We believe that the suggested £120k cost a year per retailer in the Regulatory Impact Assessment is likely to be an underestimate given our experience of investigations by the OFT. Ensuring appropriate thresholds about when and how the Adjudicator will operate will be crucial in determining final costs.[131]

159. Sainsbury's provided additional evidence of the costs it had already incurred in complying with GSCOP which suggested that this concern was not unfounded.[132] Given that the £800,000 budget includes staffing costs, we were worried in this context that the Department had not yet determined the Adjudicator's salary. [133]

160. On the other hand, the Fairtrade Foundation referred to the relatively low level of resourcing anticipated for the Adjudicator compared with the Advertising Standards Authority, whose running costs it cited as £3.45m compared with industry turnover of £3.94bn (i.e. approximately 0.1%). In similar vein the Rural Shops Alliance told us:

There is a danger of this whole area blowing out of proportion. The costs we are talking about are a tiny fraction of the profits of the companies involved. For a lot of them, it is a red herring that they are raising, rather than a real issue.[134]

161. The British Retail Consortium proposed a budget cap. However, the Competition Commission was concerned with the potential for abuses of this by the large retailers. The Commission wanted an annual budget with a contingency fund available in addition, arguing (at the time that the Adjudicator was to be known as an Ombudsman):

We consider the existence of a generous contingency fund to be important for the effectiveness of the Ombudsman. Without this, retailers may attempt to exhaust the Ombudsman's budget in the knowledge that it would be unable to function effective[ly] once this had been achieved.[135]

162. The Minister reminded us that the Secretary of State has to sign off on the Adjudicator's overall budget, which amounts to a cap.[136]

163. We have concerns that the Impact Assessment may not reflect the costs in any realistic manner. When it brings forward a Bill, the Department will need to demonstrate that its assessment of costs is sufficiently evidence-based to stand up to scrutiny.

164. Ultimately, if the Adjudicator's office succeeds in creating a culture of greater compliance with the GSCOP, its value might be largely in deterrence rather than in active investigation. In that case, we would expect to see the Adjudicator's funding being appropriately pared back, possibly to part-time rather than a full-time role, with a small back office providing supporting functions.

The levy model

165. On the proposed flat-rate levy, the Co-op commented that while the flat rate was in its view unfair, it recognised that "at least initially it is a simple and transparent funding option."[137] In the longer term the Co-op preferred a levy based system which reflected the time spent by the Adjudicator in dealing with each retailer in each year.

166. By contrast, both Asda and Waitrose wanted the funding model redesigned from the start. Asda said:

If the costs of investigations are spread across all retailers (as part of the Adjudicator running costs) then this further exposes those retailers that abide by the Code of Practice to claims against other retailers. […] The proposed funding model would punish those that adhere to the Code and needs to be revisited.[138]

167. We agree with the Government's proposed initial, flat-fee model for the levy, but recommend that the model be refined as soon as possible toward one that clearly rewards compliance with the Code.

126   Clause 20(5) Back

127   Responses to questions at Ev 93, Heading 2 Back

128   See Impact Assessment page 2, and paragraph 106 Back

129   Response to Consultation, paragraph 13 Back

130   Paragraph 11.347 of the Report Back

131   Ev 84 Back

132   Ev 85, and see reference to set-up costs in the section on compliance to date Back

133   Q 339 Back

134   Q 262, Parsons Back

135   Q 340 Back

136   IbidBack

137   Ev 72 Back

138   Ev 59 Back

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© Parliamentary copyright 2011
Prepared 28 July 2011