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


Appendix: Letter from EFRA Committee


Letter to the Chair of the Business, Innovation and Skills Committee from Miss Anne McIntosh MP, Chair of the Environment, Food and Rural Affairs Committee

22 June 2011

Pre-legislative scrutiny of the Draft Groceries Code Adjudicator Bill

On 24 May 2011, the Environment, Food and Rural Affairs Committee published a call for evidence on the draft Groceries Code Adjudicator Bill. On 14 June we took oral evidence from the National Farmers' Union (NFU) and Processed Vegetable Growers' Association (PVGA). Our principal interest in the draft legislation is its potential impact on farmers and food producers; the written oral evidence we received reflected that interest. We placed that evidence on our web pages and made it available to the Business, Innovation and Skills Committee. This letter, which has been agreed by the Committee, sets out our views on the draft Bill, and includes recommendations for the BIS Committee to consider in its pre-legislative scrutiny.

In 2008 the Competition Commission recommended the establishment of a body to monitor and enforce the new Groceries Supply Code of Practice (GSCOP), which replaced the existing Supplier Code of Practice. The Groceries Code Adjudicator Bill would establish a Groceries Code Adjudicator, whose role would include:

  • arbitrating disputes between large retailers and their direct suppliers;
  • investigating possible breaches of the Groceries Code by large retailers;
  • where an investigation finds that a large retailer has breached the Groceries Code, deciding whether to make recommendations to the retailer, require it to publish information about the investigation or (if the Secretary of State adds a power to do so) impose a financial penalty on the retailer;
  • publishing guidance on when and how investigations will proceed and how these enforcement powers will be used.

The explanatory notes to the draft Bill make clear that the Government's intention is that the Adjudicator's investigations should "consider a pattern of behaviour by one or more retailers", rather than "to decide whether to uphold a particular complaint".[155]

We received evidence from Sainsbury's Supermarkets Ltd and Asda Stores Ltd, both of which are 'large retailers' covered by the GSCOP. Sainsbury's argued that the GSCOP's provisions provided "suppliers with an effective route to resolve complaints", and that there had been few complaints made under the Code.[156] The company concluded that "the right approach would be to refrain from establishing an Adjudicator until the need for further enforcement mechanisms can be properly assessed using the reporting methods already in place under the Code".[157] Similarly, Asda Stores Ltd argued that, in proposing the establishment of an adjudicator, the Government was "acting prematurely as it has not had the opportunity to adequately assess the effectiveness of the GSCOP".[158] Asda's written evidence concluded that "A new regulatory body, of the type proposed by the Bill, acting outside of the OFT would add nothing meaningful to the GSCOP regime and could be counterproductive to the existing work undertaken by the OFT".[159]

Both supermarkets echoed statements made by the British Retail Consortium after the draft Bill's publication that the low number of complaints made under the GSCOP meant an adjudicator was not necessary.[160]

Few organisations we approached felt able to put evidence about their members' concerns about relations with retailers into the public domain. Several submissions referred to the 'climate of fear' referred to by the Competition Commission as deterring complainants. The Food and Drink Federation argued that the low number of complaints demonstrated that "the GSCOP will only work fully if there is a proactive Adjudicator in place to police it".[161] The NFU made a similar point and explained that complaints would only come forward if an Adjudicator could guarantee the complainants anonymity. The British Brands Group's (BBG) submission argued that "...suppliers are extremely unlikely to bring disputes, invoke their contract rights or complain, yet without their participation practices that act to the detriment of consumers are nigh impossible to detect, let alone prevent", and expressed their conviction that an Adjudicator able to receive complaints anonymously would overcome that obstacle.[162] The BBG helpfully provided the Committee with evidence of continuing difficulties in relations between suppliers and retailers in the form of a confidential survey of suppliers that showed that "practices that transfer risks and costs to suppliers persist".[163]

The PVGA emphasised that within the horticultural sector the GSCOP had had a beneficial impact relations between growers and retailers. However they supported the establishment of an Adjudicator and protecting the anonymity of complainants; Richard Hurst, Chairman of the PVGA told us that "...unless there is an Adjudicator, in some ways GSCOP will lose its teeth".[164]

We have concluded that an Adjudicator should be established. However, we recognise that the value of an Adjudicator depends on the willingness of suppliers to come forward with allegations of breaches of the GSCOP. This depends in turn on them having the confidence that they will not damage their existing or future commercial relationships.

Complaints and anonymity

Clause 4 of the draft Bill provides that an investigation may be carried out if the Adjudicator has "reasonable grounds to suspect that a large retailer has broken the Groceries Code [GSCOP]".[165] In determining whether to carry out an investigation the Adjudicator may only consider information provided by a supplier or that is publicly available. The explanatory notes to Clause 4 make clear that the Adjudicator "has no power to require people to provide information for the purpose of deciding whether to commence an investigation".[166]

The effect of these provisions is that the Adjudicator will only be able to launch an investigation if a direct or indirect supplier to a large retailer makes a complaint relating to a breach of the GSCOP and that complaint is backed up by evidence which has been provided by the complainant or that is in the public domain. Sainsbury's Stores Ltd argued that the adjudicator should focus "on complaints from smaller suppliers, rather than larger suppliers many of whom are multinational businesses that are larger than the retailers they supply".[167]

The draft Bill would allow either direct or indirect suppliers to make a complaint. According to Defra's written submission:

    Even though farmers and other suppliers who don't supply supermarkets directly fell outside the terms of reference of the Competition Commission's investigation, to increase transparency in supply chain practices the Commission suggested that primary producers and other suppliers to intermediaries and processors should be permitted to make complaints about alleged breaches of the GSCOP where that breach is believed to have had a direct or indirect effect on them. This proposal has been included in the draft Bill so that the Adjudicator will be able to start an investigation based on complaints from either direct or indirect suppliers, including those based overseas. This provides indirect suppliers with the same route to investigation as those that supply the retailers direct. It should be noted however, that whilst any supplier can complain, the Adjudicator will not be obliged to respond to each complaint.

Sainsbury's Supermarkets Ltd accepted that "the Adjudicator should be able to consider representations from indirect suppliers [...]but for information-gathering purposes only"; and added that to avoid spurious investigations, "the original complaint from an indirect supplier must be accompanied by evidence relating to a specific breach of the Code".[168] In contrast Asda Stores Ltd resisted allowing indirect suppliers to make a complaint; the company's written evidence states that it "...cannot understand how an indirect supplier not covered by the GSCOP and with no contractual relationship with a retailer can allege a breach of the GSCOP in relation to its dealings".[169]

Peter Kendall, President of the NFU told us that:

    What I think is always the case is that, where there is undue influence or bad practice, it finds its way down to the primary producer. I think it is important to say that although a farmer might not directly supply a retailer, the fact is that, if he is supplying a processor in the middle who is only one person—processors are often working on very small margins—any retrospective claims or additional costs find their way back to the primary producer. There will be a significant number of our members who fall into that category.[170]

The extent to which farmers and primary food producers have a direct supply relationship with retailers varies across agricultural and horticultural sectors. Our witnesses from the PVGA told us that the majority of their members would have a direct relationship with a retailer.[171] In contrast the evidence from the National Pig Association made clear that in their sector such direct relationships were rare.[172] We support the Adjudicator having the power to accept complaints from indirect, as well as direct, suppliers. However, such complaints are likely to be rare under the draft bill's current provisions as indirect suppliers would have to make a complaint related to a breach of the GSCOP, which is limited to the relationship between large retailers and their direct suppliers.

Our evidence from supplier organisations highlighted the central importance of complainants being able to remain anonymous. Clause 19 of the draft Bill concerns confidentiality. The Clause prohibits the Adjudicator from disclosing the identity of a direct or indirect supplier who has made a complaint. The explanatory notes state that:

    Protecting the identity of complainants was considered by the Competition Commission to be important in order to reduce the threat of retaliatory treatment by a large retailer if the retailer found out that a particular supplier had raised a complaint.[173]

The NFU told us that they did not consider the provisions relating to confidentiality to be sufficient.[174] Their written evidence states that some suppliers would be unwilling to pass information to the Adjudicator "in spite of their identities being kept confidential" because:

    ... other information (for instance their product sector if they are one of a small number of suppliers of a specific product) may make identification easy. Given that the only basis for the investigation would have been a supplier complaint (knowing that no such information is in the public domain), it would be clear which supplier (or at least that one of a small number of suppliers) has complained.[175]

Sainsbury's Supermarkets Ltd argued that large suppliers should not be permitted to make anonymous complaints and that, if anonymous complaints were permitted, retailers should have a right to be involved before an investigation were launched .[176] The evidence from Asda Stores Ltd stated that:

    Fundamental rules of natural justice require that defendants know the allegations against them (including the identity of the claimant), so they can investigate the allegation and prepare a defence. The prospect of anonymous complaints which could be outside the scope of the GSCOP could prejudice retailers' rights of defence.[177]

Asda's concerns about the rights of a defendant are referred to in the explanatory notes to the draft Bill. In relation to the anonymity of complainants, the explanatory notes dealing with compatibility with the European Convention on Human Rights (ECHR) state:

    The protection raises issues under ECHR Article 6 because the normal presumption in a process such as an investigation would be that the person under investigation should be entitled to know the identity of persons making allegations against them.[178]

However, while the explanatory notes acknowledges that the draft Bill engages a number of Articles of the Convention, it concludes that it "is not incompatible with them".[179]

We have not taken evidence on application of the European Convention on Human Rights to the draft legislation: this is matter that will be considered by other committees in Parliament. We conclude that the ability of suppliers to make anonymous complaints is fundamental to the success of the Groceries Code Adjudicator and would wish to see the current provisions retained in the legislation.

Proactive investigations

Several witnesses argued that the Adjudicator should be able to make proactive investigations. The Agricultural and Horticultural Board's evidence argued that the Adjudicator should have powers to implement proactive compliance audits/investigations within supply chains in order to "...both discourage and help reveal malpractice in terms of the Groceries Code and also help to bring greater transparency and understanding to the whole supply chain to the benefit of all parties".[180]

Laurence Olins, Chairman of British Summer Fruits, speaking for the PVGA, told us that the Adjudicator needed to be proactive rather than reactive and added that such an approach would enable the Adjudicator to look at generic issues that "might affect every crop and every sort of supplier".[181] The NFU also referred to the need for the Adjudicator to investigate general issues such as haulage that might have an impact on suppliers across a range of products. Peter Kendall, President of the NFU told us that adjudicator must have the ability to proactively investigate.[182]

The British Brands Group highlighted the fact that the Competition Commission had recommended the adjudicator have the ability to undertake proactive investigations in its 2008 report.

We were persuaded by the arguments in favour of the Adjudicator having the power to undertake proactive investigations. Such an approach might be of particular benefit when considering generic issues in the supply chain rather the relationship between a retailer and an individual supplier.

'Third party' complaints

To address the problem of suppliers being reluctant to make complaints the NFU and other supplier and grower bodies proposed that the legislation be amended to enable third parties to make a complaint on supplier's behalf. The NFU argue that:

    ... third parties, such as the NFU, can play a vital role in assisting the work of the Adjudicator. For instance, by allowing third parties to collate and present evidence on behalf of suppliers, important resource efficiencies can be achieved, and they can act as important conduits for identifying systemic breaches of the code of which individual suppliers would be unaware, and which otherwise might not come to the attention of the Adjudicator.

Similarly, the Food and Drink Federation argue that, when considering whether to carry out an investigation, in addition to information provided by a supplier or in the public domain, the Adjudicator should be able to consider information from a trade association representing suppliers.

In oral evidence the PVGA accepted the general principle of third parties collating and presenting evidence on behalf of suppliers. However, they noted that such a system may create additional costs for the third party organisation.[183]

The evidence from both Sainsbury's and Asda argued against allowing third parties to make complaints. The submission from Asda Stores Ltd stated that:

    We cannot see any evidence to support that an Adjudicator should be able to act on anonymous or third party complaints. The Adjudicator's primary function relates to compliance with the GSCOP and therefore should only receive complaints from direct suppliers covered by the GSCOP that are particularised, clearly set out and relate to a specific breach of GSCOP.[184]

The British Brands Group noted that the Competition Commission had recommended that the Adjudicator should "consider complaints from any other person, to the extent that it relates to a breach of the Code". The BBG stated that:

    In contrast, the Draft Bill ignores this recommendation, making the evidence threshold extremely high, being information from a supplier or in the public domain only. This is perverse, in light of the years of experience that suppliers do not inform, that practices are not discussed publicly (hence the dearth of published evidence) and that investigations are crucial to preventing the most significant breaches of the GSCOP.[185]

The Committee was persuaded by the arguments in favour of third parties, such as trade organisations, making complaints on behalf of suppliers. The Government's stated intention is for the Adjudicator to investigate systemic breaches of the GSCOP. A third party may be in a better position to collate evidence of such systemic breaches than individual suppliers. The Committee is conscious that such provisions would need to be carefully crafted to ensure that sufficient evidence was collected and to limit the third parties to suitable organisations. We consider that enabling appropriate third parties to make complaints to the Adjudicator is necessary. We therefore urge the Business, Innovation and Skills Committee to recommend that the legislation be amended to provide for third parties to make complaints to the Adjudicator on behalf of direct or indirect suppliers. The Government will need to set out provisions that ensure such third parties are appropriate bodies to take on this role and that make clear the mechanism and evidential requirements of such a complaint.

Recovery of investigation costs

Under Clause 11 the Adjudicator may require a supplier to pay some or all of the costs of an investigation if the Adjudicator carried out the investigation as a result of a complaint by the supplier which, the Adjudicator is satisfied, was vexatious or wholly without merit. Our witnesses accepted the need for a mechanism to limit vexatious complaints. We considered the draft legislation's provisions relating to the recovery of investigation costs were appropriate.

Adjudicator's forms of enforcement

Clause 7 of the draft Bill sets out the enforcement measures available to the adjudicator if an investigation finds that a large retailer has broken the Groceries Code. They are one or more of:

  • make recommendations;
  • require information to be published;
  • impose financial penalties.

Clauses 8, 9, and 10 set out provisions in relation to recommendations, publishing information and financial penalties respectively. Clause 10 sets out the provisions relating to financial penalties. The Adjudicator would only have recourse to financial penalties following secondary legislation made under Clause 10. The explanatory notes state that:

    Financial penalties are the most severe of the enforcement powers available to the Adjudicator following an investigation. They may not be necessary in order to secure a high level of compliance. This power therefore applies only if the Secretary of State has authorised the Adjudicator to impose financial penalties.

The NFU argue that the Adjudicator's enforcement powers are inadequate:

    Firstly, we believe the ability to impose financial penalties should be available to the Adjudicator from the outset, and not following the passing of further legislation, as is currently the case.

We note that the Competition Commission recommended that financial penalties should be available the Adjudicator if large retailers were found to be breach of the Code. Sainsbury's argue in its submission that levying financial penalties "would be disproportionate and would risk undermining the dispute resolution process already available".[186] Asda argued that the draft bill should "prescribe the maximum level of financial penalty that the Secretary of State can order".[187]

We see no reason for the Adjudicator's powers to levy fines on retailers found to be in breach of the GSCOP to be delayed by the requirement for the Secretary of State to make an order. We therefore consider it appropriate for the legislation to be amended to provide the necessary powers from commencement of the Act.

Conclusions

The Committee's conclusions in relation to the draft Bill were:

  • that an Adjudicator should be established;
  • that the Adjudicator should have the power to accept complaints from indirect, as well as direct, suppliers;
  • that the ability of suppliers to make anonymous complaints is fundamental to the success of the Groceries Code Adjudicator;
  • that the Adjudicator should have the power to launch proactive investigations;
  • that third parties, such as trade organisations, should be able to make complaints to the adjudicator on behalf of suppliers, but that appropriate restrictions would need to be included in those provisions;
  • the provisions relating to the recovery of investigation costs are appropriate; and
  • that the Adjudicator should have the power to levy financial penalties without the need for an order by the Secretary of State.

We are grateful to all those who provided written and oral evidence and trust that the BIS select committee will reflect that evidence and our conclusions in its report to the House.

Miss Anne McIntosh MP
Chair


155   Draft Groceries Code Adjudicator Bill Back

156   GCA 09 Back

157   GCA 09 Back

158   GCA 08 Back

159   GCA 08 Back

160   British Retail Consortium press notice  Back

161   GCA 04 Back

162   GCA 10 Back

163   GCA 10 Back

164   Evidence to the EFRA committee, 14 June 2011, Q 93 Back

165   Draft Groceries Code Adjudicator Bill, Cm 8080, page 15 Back

166   Draft Groceries Code Adjudicator Bill, Cm 8080, page 14 Back

167   GCA 09 Back

168   GCA 09 Back

169   GCA 08 Back

170   Evidence to the EFRA committee, 14 June 2011, Q 3 Back

171   Evidence to the EFRA committee, 14 June 2011, Q 50 Back

172   GCA 02 Back

173   Draft Groceries Code Adjudicator Bill, Cm 8080, page 24 Back

174   Evidence to the EFRA committee, 14 June 2011, Q 9 Back

175   GCA 07 Back

176   GCA 09 Back

177   GCA 08 Back

178   Draft Groceries Code Adjudicator Bill, Cm 8080, page 44 Back

179   Draft Groceries Code Adjudicator Bill, Cm 8080, page 44 Back

180   GCA 03 Back

181   Evidence to the EFRA committee, 14 June 2011, Q 73 Back

182   Q 4 Back

183   Evidence to the EFRA committee, 14 June 2011, Q 75 Back

184   GCA 08 Back

185   GCA 10 Back

186   GCA 09 Back

187   GCA 08 Back


 
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© Parliamentary copyright 2011
Prepared 28 July 2011